Wetter cities, drier (but richer) rural areas

John Quiggin has a terrific CEDA report out today. From the executive summary:

Replacing city water restrictions with higher prices in the long term will encourage people to invest in water-saving technologies, find other ways to use less water, and encourage the development of new supply options such as recycling.

The report also argues Australia needs to free up the controls that now stop irrigators from selling more water to city users. Selling cities an extra six per cent of the water now used for irrigation could add 20 per cent to city water supplies and “make a significant difference to the availability of urban water”, it says (see page 46 of the Overview).

Irrigation uses approximately 70 per cent of Australia’s water supply and is priced at around 10 cents for every 1000 litres. Urban households and business account for about 25 per cent of total water use, but pay around $1 per 1000 litres. Even allowing for the costs of treatment and distribution, this is a large gap. In the absence of controls, city water firms would find irrigation water an attractive supply source – and some irrigators would make more money selling water to the city than using the water on their crops.

This latest CEDA report extends the conclusions of CEDA’s landmark 2004 report Water and the Australian Economy, which warned that Australia was entering a period of water scarcity that would demand more market-based approaches.

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8 Responses to Wetter cities, drier (but richer) rural areas

  1. Kevin Cox says:

    Can you give us a link to the report. I have been to the CEDA website but cannot find it.

  2. Andrew Leigh says:

    Kevin, I have a link, but CEDA says it’s for “media only”, and I’m not allowed to share it. Hopefully they’ll post it to their website soon – the embargo was 12.01am 12 Feb.

  3. John Quiggin says:

    I’ve posted it here.

  4. Andrew Leigh says:

    Thanks John. I’ve updated the link in the post.

  5. Brendan Halfweeg says:

    I’m not sure arguing for windfall profits for irrigators is a sensible way forward for freeing up the water market.

  6. Andrew Leigh says:

    Brendan, are you proposing expropriating the water rights instead? If not, I’m pretty happy to pay irrigators a few extra dollars a year so I can water my lawn anytime I want. My guess is that most people would feel the same way.

  7. David Rubie says:


    What is being proposed is close to the farcical situation in the EU and US where farmers are paid NOT to grow things. They have been rightly pilloried for this idiocy (although in terms of market protection).

    In this case, we’ll have irrigators being paid not to farm, just so you can have a green lawn? Exactly how is the water from our non-irrigating irrigators supposed to make it’s way into the city reservoirs, and how much is that going to cost? What are the costs going to be to the long term bio security of our food supplies?

  8. Brendan Halfweeg says:

    Brendan, are you proposing expropriating the water rights instead?

    Unless the water lands on their property and they build a dam to collect and store it, why is it their water?

    If property rights extended to natural resource rights, then land upon which rivers flow could be owned and the owner would be entitled to the resources found on that property. A market for water would ensure that water rights are allocated efficiently.

    Clearly, a non fixed resource like water is not the same as minerals in every respect. Rivers flow and water passes through and require capital investment to make use of water (dams, weirs, canals), harder to use water would not be as profitable as easier to use water, downstream users would pay upstream owners not to develop their water resource in proportion to the ease of use of the water and to maintain the quality of the water (property rights improve the environment). However, gold in the ground (or tree, or pasture) is essentially worthless unless you have the capital to extract it, its value to a miner (or lumber supplier, or dairy farmer) is the difference between what it costs to extract and what they can sell it for, so in this way water is like other natural resources.

    Private ownership of rivers would lead to better management of rivers, since the owners would have the incentive of keeping their rivers in a healthy state to ensure maximum profit from fishing, recreation, transport, irrigation, potable water supply. They’d also have an incentive to pay upstream suppliers (owners of catchment area land) to manage their land in such a way to maintain clean water. I pay you to keep your use of fertilizer to certain limits so my water is clean, penalties apply to how much I pay you for the water if you don’t and can take you to court for not upholding your end of the contract.

    Unless we had such a fundamental reform to property rights, then water is owned by the crown (just like other natural resources found on private property). Owners or irrigation schemes could be required to pay royalties to the crown for the water they use, the same royalties other users pay. Turn the sale of water rights into an auction, and you have a water market, albeit with government involvement (and enforcement). Not quite as effiicient as the previous option, since the government does not have the same profit incentive as a property owner.

    I find it incredible to argue for a rent seeking solution to efficient water use. Grant farmers special water rights that other land users don’t receive and then allow them to make money from water that they don’t own or develop (ie. it doesn’t fall on their land and they don’t invest in the capital to capture the water for use). Why are farmers any different to other land users? Why should they get privileged water rights?

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