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July 17, 2003

"Fixing" the Murray

I see that John Quiggin has a post on River Murray. His argument is about the cost to fix the Murray. Many of the current proposals, he says, are outlandish in terms of the amounts involved. So he has a quick look. It is good to see economists getting involved in the issue.

John says:

"I thought of the following as a back-of-the-envelope exercise in cost estimation. Suppose the government bought back 1500GL of water at $40/ML/year, this would be an annual payment of $60 million, which could be financed from a capital sum of $1 billion at 6 per cent interest. I'd guess that increasing natural flows would solve about half the problem, which would imply a total cost of the order of $2 billion. This is incredibly crude, but I'd think the order of magnitude $1 billion - $10 billion is about right, and that we are likely to end up spending something around the low end of this range."

I have some queries.

First, this seems to imply that governments enter the water market each year and buy the 1500 gigalitres required for enviromental flows. Why that option? Why not reduce the cap by 10-12%. Why not buy back water licences permanently? Why not take farm land out of production--pay the farmers to leave?

Secondly, we have $1 billion for environmental flows and $1billion for the other half of the problem. What is the other half of the problem? Land restoration? Reducing water consumption? Shifting to sustainable agriculture?

Thirdly, how do we go from $2 billion to $10 billion? Is this an insurance for the rapid rise in the cost of water due to increasing shortage?

Fourthly, I appreciate its back of envelope calculations but John does talk in terms of "fixing" the Murray. It is not clear what 'fixing' means in this context. It is often suggested that the "fixing" problem is about the demand of the domestic consumers, who are unwilling to pay a higher price for their vegetables.

This was implied by Ticky Fullerton in her 4 Corners Sold Down the River. Sure those living in the cities need to change their habits in the use of water, and we need to redesign our cities to make them more sustainable. But the centre of the "fixing" problem is the unsustainable agricultural practices of farming systems (eg., the wine industry) that are now geared to exporting their products to overseas markets.

The queries are offered in the spirit of dialogue and debate.

Posted by Gary Sauer-Thompson at July 17, 2003 01:58 PM

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» A cascade down the Murray from John Quiggin
The cascade mode of debate in which an initial post attracted comments, followed by responses, to which further responses were then attached, all indented with quotes, made the old USENet nearly unreadable. Blogs have generally avoided this style. The ... [Read More]

Tracked on July 18, 2003 09:14 AM

» A cascade down the Murray from John Quiggin
The cascade mode of debate in which an initial post attracted comments, followed by responses, to which further responses were then attached, all indented with quotes, made the old USENet nearly unreadable. Blogs have generally avoided this style. The ... [Read More]

Tracked on July 18, 2003 09:17 AM

» A cascade down the Murray from John Quiggin
The cascade mode of debate in which an initial post attracted comments, followed by responses, to which further responses were then attached, all indented with quotes, made the old USENet nearly unreadable. Blogs have generally avoided this style. The ... [Read More]

Tracked on July 24, 2003 12:51 PM

Comments

The crux of the Murray's problem is one that besets much of the industrialized worlds' use of natural resources. Simply that private users/consumers are often not paying the real social cost of resources. This should be apparent to all today, with the use of Murray/Darling water basin resource.

IMO there is no shortage of the resource, just an excess of demand over sustainable, ecological supply at the current level of private cost to users. (Note here that the private cost may be above that which the tax-payer is currently prepared to pay to provide acceptable environmental flows) As tax-payers we have two choices- Reduce water allowances to users across the board and use the water saved for environmental flows or- Raise the price via tax or levy and achieve a similar result. Here I would suggest that there is no doubt both approaches will achieve the desired outcome, but which path is the better?

The answer is as usual to pull on the price lever rather than the quantity lever. This is largely due to rationing requiring the wisdom of the Almighty to produce socially desirable outcomes. If you don't believe this try imagining how you would ration the resource between the desire of a consumer to wash the car, water the lawn or enjoy a bottle of irrigated plonk. Good luck! Should you ration water on a per-capita basis or a per-hectare basis? Both forms will lock in past inherited structural deficiencies and inefficiencies. Try sorting out the competing claims of the back-yard lawn grower cf. the broad acre cotton grower with that choice and you'll quickly settle upon price. Yes, jack the price up until enough marginal users drop out of the market to provide the environmental flows deemed necessary. As well, the ensuing rise in the cost of water for the remaining users, will give them the incentive to invest the higher level of resources needed to conserve their higher priced input even more.

Posted by: Observa at July 18, 2003 02:15 AM

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