Droughts, deluges, and (river) diversions: Valuing market-based water reallocation
Monday, January 27, 2020
Taylor-Hibbard Seminar Room (Rm103)
1:30 pm-3:00 pm
This paper studies a water market used by irrigated farms inhabiting a connected river network in Australia’s southern Murray-Darling Basin during a period of substantial environmental change (2007–2015). It uses new panel data to estimate shadow values of water for each farm from production functions identified with regulatory variation in river diversion caps. The estimates imply that observed water trades increased irrigated agricultural output by approximately 4–6%. Without this reallocation, output is the same as under an 8–11% uniform reduction in water resources, roughly the median reduction predicted for this region under 1?C of global warming. The value of the water market is increasing and highly convex in water scarcity, with realized gains an order-of-magnitude greater during drought, concentrated in regions with stricter diversion limits and among farms with less rainfall. This suggests that retrospective analyses may understate the future value of trade in a changing climate and that a water market is an important institutional adaptation to climate change.