Are Water Markets Maturing

In a mature water market with many active buyers and sellers and with a free flow of information about supply, demand and prices paid, prices should not vary greatly at any given time. Willing buyers should always be prepared to pay the going price set by the most efficient and highest value producing irrigators. This paper will analyse the prices paid in two water markets in Australia and identify which factors affect the prices offered and accepted by buyers and sellers. The buyers and sellers perception of the purchase and sales price will also be analysed as an indicator of the market participant’s knowledge of the prevailing market prices. The paper shows that in the emerging market prices fluctuated widely and markets generated some inefficient outcomes. As markets matured and restrictions on trade were eased, price fluctuations were reduced and market outcomes became more rational. Major determinants of water prices are differences in market restrictions, water use efficiency, value of commodity produced and the buyers and sellers bargaining strength. 1 From 1995 to April 2001 Land and Water Australia funded this research, and the Australian Research Council and ten industry participants fund ongoing research until April 2004. These grants are held jointly by the author and Professor of business law Dr. Jennifer McKay, also of the School of International Business. I would also like to thank one reviewer for very useful comments.