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Comparing Implicit and Explicit Water Prices During the Early Years of Water Trading in Australia

Author/s: Henning Bjornlund, Martin Shanahan

Date Published: 1/01/2009

Published in: Volume 15 - 2009 Issue 3 (pages 278 - 302)

Abstract

This paper examines aspects of changes to explicit and implicit water prices during the early years of water trading along the River Murray. Focusing on the mid to late 1990s, it traces price changes that occurred during the transition from an ‘immature’ market, where the supply of unused water influenced sales, to an early maturing stage where sales of water from inefficient to more efficient users begins to increase. Importantly, the time period used precedes the date at which land and water rights were formally separated in title and therefore covers a period where land was transacted with the value of the water embedded in the price. Hedonic functions are used to analyse the transactions of irrigated farmland to identify the implicit price of water when sold together with irrigated farmland and compare these to the explicit price paid for water entitlements in the water market. This comparison is conducted separately for three states. There is tentative evidence to suggest that: 1) prices in the two markets tended to converge; 2) the convergence process varies between states depending on how long the entitlement market has been in operation and the type of major water use; and 3) the more capital intensive the production and the more it is based on permanent crops, the more the implicit price is linked to investments in water dependent improvements.

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Keywords

Price Convergence - Water Entitlements - Water Prices - Water Trading - Water Value

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