Efficient water market mechanisms to cope with water scarcity

Water markets are increasingly being relied upon as an instrument to reallocate water between competing users under conditions of water scarcity, and within an environment of fully committed water resources. Without such a reallocation new irrigation developments cannot take place and economic developments will be forgone to the detriment of rural communities. There is therefore a need for continued development of a water market mechanism to ensure that this reallocation process can take place as efficiently as possible, and to alleviate the socio-economic impact of water scarcity. Since markets are still emerging around the world it is important to learn from operating markets. This paper discusses the operational mechanism of a water exchange in Victoria, Australia, and analyses the outcome of the first five years of operation.