An Economic Model of Spatial and Temporal Water Trade in the Australian Southern Murray‐Darling Basin

Abstract

AbstractWithin the Australian southern Murray‐Darling Basin (sMDB) water markets have become a key institutional response to water scarcity and environmental problems. These markets facilitate trading of water among many users and across multiple connected regions. Increasingly, these markets also support intertemporal transfers via the carryover of user water allocations within public water storages. While trading can improve the spatial allocation of water, carryover can improve the temporal allocation by ensuring storage reserves reflect prevailing user preferences. This paper presents an economic model of water markets and irrigated agriculture in the sMDB. A reduced‐form statistical model of water demand is estimated using historical irrigation and water market data. This statistical model is placed within an economic partial‐equilibrium framework accounting for both interregional trade and interyear carryover. The model is solved numerically for a dynamic market equilibrium given assumptions over future stochastic water supplies. Out‐of‐sample tests show the model can realistically simulate water market prices and irrigation activity across the basin. The model is applied to estimate the economic benefits of interregional water trading and interyear carryover. Results show around a third of the economic benefits of water markets in the region can be attributed to interyear carryover.