From: Alistair Watson [aswatson@bigpond.net.au]
Sent: Friday, 6 January 2006 11:17 AM
To: waterstudy@pc.gov.au
Subject: Submission

Attachments: AER; ACCC Paper
Dear Waterstudy,

The main parts of this submission to the Commissioned Research Study by the Productivity Commission ‘Rural Water Use and the Environment: The Role of Market Mechanisms’ are the two attached papers. The two papers are related. The first was written in 2003 and published in the June 2003 issue of the Australian Economic Review. The second paper was written for a conference organised by the Australian Competition and Consumer Commission in July 2005.

The purpose of this message is to make a few additional observations prompted by reading the Issues Paper for the PC Study and re-reading my own work. Information required for the Submission Cover Sheet is provided at the end of the message.

The PC would perform a valuable service if it shifted the current emphasis of the National Water Initiative away from ‘water planning’ which implies and almost invites bureaucratic control, and inevitably would protect established interests, towards considering markets and market mechanisms as devices for the discovery of economic information, especially about environmental facts and values. Without an economic approach, mindless and unproductive intervention is as likely in pursuit of environmental objectives as it was in the expansion phase of irrigation. A discovery view of market mechanisms rather than a planning view suggests that experiments (trials, pilots, etc) are to be encouraged. Modern theories of the economics of information should come into play in institutional design.

Reading between the lines in the Issues Paper, the official pre-occupation with water use efficiency is seen for what it is, another expression of voodoo economics and political convenience. A danger to the public of all this shoddy thinking is that the costs of investment in off-farm and on-farm irrigation infrastructure will be shifted on to taxpayers. Farmers and sections of the environmental movement could find common cause in these endeavours. There is the further prospect of engineers’ picnics in the quest for water savings in the name of the ‘environment’ just as there was in the era of uncritical irrigationism. Romanticism and professional opportunism rather than empiricism are just as possible in modern times. Governments are still as feckless.

After a decade or more of water trading, the score is on the board with respect to its advantages. The PC needs to consider outstanding restrictions on interstate trade, interregional trade and environmental trade. Permanent and temporary trade are close substitutes so it is likely that effects on production of remaining constraints to trade are less than usually thought. Allowing environmental trade would serve several useful purposes including reducing ambit claims for environmental flows.

The PC may be dodging serious issues in the northern Murray-Darling Basin by concentrating on the southern-connected M-D system where more progress has already been made in water trading and various environmental initiatives.

The above brief remarks are meant to introduce the more detailed treatment in the attached papers.

Alistair Watson
January 6, 2006.

Submission Cover Sheet

Alistair Watson
403/147 Beach Street
Port Melbourne
Victoria 3207

Phone 03 9646 1719
Fax 03 9645 1174
Email aswatson@bigpond.net.au
Mobile 0419 005 826