Towards an Understanding of Static Transaction Costs in the NSW Permanent Water Market: An Application of Choice Modelling

Abstract

Lin Crase, Brian Dollery and Michael LockwoodAbstractThe theoretical foundation of water market reforms presumes that such institutionswill allow water to be traded from relatively low-value to higher-value uses andsimultaneously accomplish many of the economic and environmental objectivesascribed to water resource managers. Numerous ex ante analyses have beenconducted to model the impacts of entitlement markets, allocations for theenvironment and other recent legislative changes pertaining to water (see, forinstance, Hall, Poulter and Curtotti 1993; Crean et al. 1998). In general, theseanalyses support the market framework as a technique for allocating water as itbecomes increasingly scarce. However, a relative dearth of information exists aboutthe impact of legislative change itself on the citizenry who are required to assimilateand conform to the changing rules within a market setting. This paper explores theimpact of the resulting attenuation of property rights on the behaviour of potentialbuyers and sellers of water in the market for permanent water transfers in NSW. Thepaper uses a Choice Modelling approach to enumerate the value of a more stable setof property rights.1.0 IntroductionWater markets have become an integral component of the reformed institutions thatgovern the allocation of water resources in the mature water economy (see, forexample, Rosegrant 1999; Bauer 1997; Thobani 1997). In Australia, the Council ofAustralian Governments [CoAG] water reform process strengthens the role of watermarkets by requiring, amongst others, that the nexus between land and water titles be