Water markets’ promise: the Murray-Darling Basin

The very advanced and well-designed water markets in the Murray-Darling Basin are the result of long and complex reforms. Using state-level export data for agricultural and manufacturing sectors, we study the impact of water markets on the allocation of water through the first (1994-2006) and second reform periods (2007-2015), relative to when the markets’ foundations were laid (1988-1993). We find water markets trigger a shift away from the water-intensive (less water-productive) sectors that is most pronounced during droughts in the first reform period. However, improvements in technology and techniques that reduce water intensity (increase water productivity) partially offset such a shift. We also document an inter-sectoral shift of activity between agriculture and manufacturing, as well as address some recent criticisms of water markets’ effectiveness.