Water Policy Reform in Victoria: A Spatial Equilibrium Approach

In February 1994, the Council of Australian Governments (COAG) endorsed a strategic framework for water sector reform in Australia to be implemented by the year 2001. In response to the COAG strategy, a project was initiated in association with the NSW Agriculture and the Victorian Water Bureau to assess the economic welfare effects of different water policy reforms. A spatial equilibrium model was developed to facilitate evaluation of policy measures. The purpose of this paper is to report on the development of a spatial equilibrium model of the Victorian irrigation sector. At this stage, only a basic set of results from the model has been presented. However, three interesting observations emerge. The first is that the relatively abundant supply of water in Victoria limits the ability of markets to discover prices for water. Trade in water is dominated by only a few demand and supply centres which make up over half of all water transactions. Finally, water movement constraints are responsible for a prediction that the traded price of water will vary between two regional trade blocks.