Abstract
Significant reforms made to Australian irrigation property rights in recent years have enabled the development of an active seasonal water market. In contrast, decisions regarding the allocation of water across time are typically based on central decisions, with little or no opportunity offered to irrigators to manage risk by physically transferring their water access right between years by leaving it in the public dam. An empirical examination of the economics of water storage is presented using a case study of the Goulburn Valley, a major irrigation region in the state of Victoria. It is shown that, compared to the historically used, centrally determined storage policy, a market‐based storage policy would store more water, on average, and would also allocate more water in periods of low rainfall. The analysis indicates that the costs associated with a recent prolonged drought were $100 million more than they would have been if water storage decisions had been guided by the market and prices were 3 times higher.
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