Watering Down Property Rights for the Sake of the Environment: A Consideration of the Environmental Benefits of Attenuated Water Rights in NSW

Many policy makers have begun to question the efficacy of water reforms that rely on markets as the principal mechanism for allocating the resource to its highest-value use. One of the concerns in this regard has been the relative paucity of permanent trades despite earlier analyses that have identified substantial potential gains from trade. This phenomenon has often been attributed to the difficulties of completing deals in the permanent water market when rights are substantially attenuated. Whilst some empirical evidence is now emerging on the size of these impediments, only limited attention has been given to the broader welfare implications of policies aimed at enhancing the efficiency of the water market by strengthening rights. This article examines the welfare implications of attenuated water rights in the market for permanent water entitlements in NSW Estimates of foregone market surplus are used as the foundation for establishing threshold environmental values arising from the present attenuation. Results reveal a relatively modest foregone surplus suggesting that further strengthening of the water rights of irrigators should be considered with caution.