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March 5, 2008
Currently we don't have have well-functioning water markets; not in cities, or the irrigation areas in regional Australia.Instead, we have administered prices, legal protections on restraint of trade and, as a consequence, rationing. The states have really made a mess of water. They used cheap subsidized water to foster development in rural Australia, and they done little to deal with the negative consequences of their incompetent management. It's a mess.
Ken Henry argues that the state should allow the market to allocate water resources instead of the state governments rationing demand through regulation. Henry says:
About 2 1/2 years ago, I identified energy, water and land transport as three key candidates for the development of national markets, arguing that the case for governments facilitating the development of highly efficient national markets for key business inputs in a country as remote and geographically fragmented as ours is overwhelming. Our achievements to date have fallen well short of that goal. It may not be too much of an exaggeration to say that the only significant business inputs for which we do have national markets are financial capital, post, telecommunications and aviation.
Rationing is not a long term solution when there is a long term reduction in water supply due to global warming. Of course, the irrigation lobby talks in terms of a drought not climate change and puts its hand out for ever more subsidies to help it get through the "temporary" difficulties.
So why the deep resisitance to reform? Is it because of the National Party--those agrarian socialists---blocking the government buying back water entitlements as I have argued? Henry takes a broader perspective
The central explanation for slow progress in these areas is an aversion to the logic of markets. That aversion seems to be based on a fear of distributional consequences. Of course, there are legitimate reasons for governments to be concerned about the distributional consequences of markets. But Australian governments have numerous policy instruments available to them to ameliorate distributional consequences.And they have not been afraid to use them.
He says that though transfer payments are not without their problems, including adverse effects on work and saving incentives, but they generally achieve more transparent distributional - as well as more efficient - outcomes than interference in markets through administered prices and rationing.
In this article in The Canberra Tines Henry argues that:
If we had a well-functioning market in water, all users would pay a price that reflected the amortised costs of water storage and reticulation infrastructure, and also its scarcity value. Moreover, while water wouldn't have the same price everywhere, arbitrage would ensure that any difference in water prices between any two places and/or two points in time would be no larger than could be explained by the costs of transport and storage.
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We as a nation should not provide water to those living West or East of the Dividing range until:
The Indonesians have the latest patrol boats; and, a fleet of up-to-date white Mercedes Benz autos are provided to PNG Government ministers. Then, and only then, should we worry about Australians.