Moving from piecemeal accounting to a pragmatic economic approach to water pricing in Australia

It is often said that water is under-priced and that if the full cost of water were charged, water use would be more sustainable. Moving from a statement to actual practice requires a shift in thinking about the fundamental economics. Australia has embarked on a process of economic reform and part of the reform package in the water sector has required States within Australia to report on progress towards full cost pricing, including the set of costs and, in some circumstances, benefits, through changes to the environment. Economists refer to these costs and benefits as externalities. Identifying the potential set of externalities is context-specific and requires a multidisciplinary approach. In this paper the environmental externalities related to water use are described for the River Murray, the largest river in Australia. A pragmatic approach, grounded in economic principles, is suggested to incorporate externality costs in the price of water.