Effectiveness of a market-based instrument for the allocation of water in a tropical river environment

The seasonal nature of Australia’s tropical rivers means that connected groundwater aquifers are an important source of both consumptive and non-consumptive water, particularly during the dry season. The management of these common pool groundwater resources is one of the predominant water issues facing northern Australia. A national program of water reform stipulates the expansion of water trading as a key instrument for water allocation. The effectiveness of new institutional arrangements such as water markets will be determined mostly by how well they coordinate with local environmental requirements, local institutions and local norms. This paper describes a novel application of combined field work, institutional analysis, experimental economics and agent-based modeling to the analysis of a potential water market in the Katherine region of the Northern Territory, Australia. The effectiveness of different versions of the policy instrument is assessed in light of local conditions. Instruments that enable personal relationships and local institutions and norms to play a role in water management are found to be more effective in terms of both farming income and environmental impact.