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The Impact of Institutional Path Dependence on Water Market Efficiency in Victoria, Australia

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Abstract

Water governance in Australia’s irrigation sector has undergone substantial change over the last three decades. In part, this change has been the result of a shift in intellectual thinking regarding the pricing and allocation of irrigation water with a move away from primary reliance on government to undertake these activities and a greater dependence on markets. Institutional change will be impacted on by the existence of institutional path dependence created by previous frameworks. Path dependence arises because actors are unable to predict the exact outcome of decisions made at different junctures in time. Individual decisions may be temporally remote but will impact the subsequent path of change as a result of lock-in. In turn, institutional path dependence may create some rigidity within new institutional arrangements. Evidence of current trading restrictions on Victorian water markets illustrates this outcome. These restrictions may not be permanent, but in the short-run they have limited, to some extent, the gains accruing from water trading.

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Notes

  1. Markets require good governance but this does not always come in the form of ‘government’ typical of the modern nation state. For example, tribal villages have governance power vested in a chief or group of elders who are responsible for creating the rules of the game when it comes to resource ownership and exploitation. Further, in California during the 1849 gold rush, in the absence of government, miners themselves defined and enforced resource access and use rules thereby providing effective governance for market stability (Libecap 2007; Umbeck 1981).

  2. Throughout the remainder of the paper the term ‘efficiency’ will refer exclusively to economic efficiency unless otherwise clarified in the text.

  3. An impure public good has features of both private and public goods in that they are rival but non-excludable. Refer to section three for more detail.

  4. In-stream salinity is the result of saline groundwater recharge and run-off from saline irrigation areas. Run-off is the result of saline groundwater being discharged at the soil surface and concentrated by evaporation. This damages soils on-site and the salt eventually drains into river systems (Beresford et al. 2004).

  5. Section four states, “The right to use all of the water at any time in any river stream watercourse lake lagoon swamp or marsh shall for the purposes of this Act in every case be deemed to be vested in the Crown…”

  6. National defence is a good example because an army is unable to prevent supplying defence to citizens that have not paid their taxes. Further, because defence is non-rival the amount supplied to one individual does not reduce the amount available for others.

  7. Non-rivalry may exist only at low levels of use so that these resources become increasingly rival as user numbers rise because of congestion. For example, members of a tennis club are permitted to use available court space whenever they please but the amount of court space is limited so that if all members want to practice at the same time congestion problems arise. Congestion leads to increasing rivalry over available court space.

  8. A vast literature deals with the rise and fall of commons arrangements for example: Alston et al. 2009, 2011; Demsetz 1967; Dennen 1976; Hardin 1968; Libecap 2007; Wade 1988.

  9. Competition will be characterised by a race because non-excludability means one actor cannot prevent other actors from utilising the resource. In turn, actors are unable to place exclusive claim on the rental stream accruing from resource exploitation in future periods. This uncertainty creates incentives that encourage a race by all actors to harvest as much of the good as possible in period one. In order to maximise harvesting efforts increased capital investment is required for example in the case of a fishery, bigger boats and more sophisticated harvesting equipment. The result is the tragedy of the commons (Hardin 1968).

  10. The building of a vast storage network and extensive river regulation ensured farmers had guaranteed water supply even during prolonged drought. In an ordinary rainfall year farmers were guaranteed 100% of their water rights. In drought years supply would decrease to 70%. Guaranteed supplies created income stability for farmers so they were partially protected from boom-bust cycles caused by Australia’s variable climate. Farmers’ incomes were also kept stable via extensive price regulation of agricultural goods, broadly referred to as price stabilisation schemes. For further details refer to McKay (1968).

  11. The VSRWSC was the first statutory corporation of its kind in the world. Section 28 of the 1905 Water Act stated the Commission was to be a body corporate and was to have, “perpetual succession and a common seal and be capable in law of suing and being sued.”

  12. Marginal cost pricing requires each additional unit of a product to be priced at the cost of that extra unit. Pricing below marginal cost means a business will charge a price for the additional unit that does not allow them to recoup production costs. No profit maximising firm in a competitive industry would price below marginal cost.

  13. It was possible to trade water on the New South Wales and Victorian gold fields during the 1850s and 1860s with the adoption of prior appropriation. For details refer to Harris (2010).

  14. This 4% limit remains in place as at July 1, 2011, refer to the Victorian Water Register (2011) website: http://waterregister.vic.gov.au/Public/Reports/WaterTradeFourPercent.aspx <Accessed July 5, 2011 > .

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Acknowledgments

I extend many thanks to Robert Brooks, the Editors, and two anonymous referees for valuable feedback on previous drafts. All remaining errors are my own.

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  1. Monash University, Melbourne, Australia

    Edwyna Harris

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  1. Edwyna Harris
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Correspondence to Edwyna Harris.

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Harris, E. The Impact of Institutional Path Dependence on Water Market Efficiency in Victoria, Australia. Water Resour Manage 25, 4069–4080 (2011). https://doi.org/10.1007/s11269-011-9884-0

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