Defining property rights to water in complex regulated river systems: generalising the capacity sharing concept

It is commonly noted that Australian water rights, specifically those prevailing within the Murray-Darling Basin,represent a significant departure from hydrological reality (see for example Young and McColl 2009). Where waterrights depart from the physical realities of water supply networks, water use and water trade decisions may result inexternal effects and associated allocative inefficiency. This paper examines how a more exclusive set of water propertyrights based around the concept of capacity sharing (Dudley and Musgrave 1988) might be defined and implementedin complex regulated river systems. In particular, the paper considers how the capacity sharing concept might begeneralised to accommodate complex water supply systems (e.g. with multiple storages and or unregulated river flows)and large regulated river basins (e.g. with multiple connected water supply systems).Previous research on water storage rights and capacity sharing (Hughes 2009, Brennan 2008) focused extensively onintertemporal efficiency. In this paper the focus is primarily on spatial efficiency, in particular the potential to improveefficiency by incorporating a more accurate representation of water supply networks into water property rights.The paper also considers some of the challenges that may be associated with implementing such a system of waterproperty rights, including distributional consequences, transaction costs and aspects of ‘jointness’ in the delivery andconsumption of water.