Estimating socially-just outcomes to trade in water markets : a cooperative game theory approach

Tisdell, J. G. (John G.) (1994). Estimating socially-just outcomes to trade in water markets : a cooperative game theory approach PhD Thesis, School of Economics, The University of Queensland.

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Author Tisdell, J. G. (John G.)
Thesis Title Estimating socially-just outcomes to trade in water markets : a cooperative game theory approach
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 1994
Thesis type PhD Thesis
Total pages 309
Language eng
Subjects 14 Economics
Formatted abstract
This thesis addresses the issue of equity in the debate on water management in Australia from the viewpoint that formal theories of social justice can be used to assess broad principles of water management, as defined by water doctrines and legislation, and alternative water policy options. Water economies in Australia have entered into a mature phase involving high competition for water and increasing recognition of the need of riverine ecosystems. No longer do water authorities look solely to the construction of bigger dams to solve water issues. Rather, they examine options of improving the allocation of existing water entitlements in conjunction with environmental and social policy objectives. Their objective is seen as promoting efficiency and equity of water allocation while protecting the environment. This objective will only be achievable if the legislation gives clear direction in terms of the role and power of water authorities, as well as guidelines for the transfer of extractive water entitlements and the establishment of environmental water entitlements. Within the legally defined role and jurisdiction of water authorities, policy formation, assisted by modelling, needs to be able to encompass economic efficiency, social justice and environmental flows.

The fleeting and interdependent nature of supply of water has meant that rights to water have tended to be legal rather than tangible entities. Without legal justice there cannot be social justice. Therefore the methodology for evaluating water management issues adopted in this study begins with the social justice of the legal foundations of water management. Water doctrines, as well as specific state legislation and judicial decisions, are assessed in terms of the principles of social justice proposed by Bentham, Nozick and Rawls. The non-priority permit water doctrine which has developed in Australia is found to be more capable of producing an equitable distribution of the water than the traditional riparian or prior appropriation doctrines. Specific water legislation in eastern mainland States of Australia are examined and while supporting the water authorities in promoting social justice objectives, are found to give little guidance to water authorities on how to achieve equitable distributions of water entitlements in a market environment. The legislation needs to be more specific on issues of social justice and equity, if water policy decisions made on such grounds are to be defendable in court.

While broad principles of water management and legislation can be assessed in terms of social-justice criteria, principles of social justice or equity will become meaningless cliches of legislation unless they are implemented in the formation of water policy. Cooperative gaming provides a means of modelling social justice at a microeconomic level in evaluating alternative water policy options. Using cooperative game theory it is possible to incorporate the bargaining nature of (particularly thin) water markets and the dual objectives of efficiency and social justice.

Using an n-person cooperative game theory model, potentially efficient and socially-just payoff vectors from trade in water entitlements are estimated. Representative farms from the Border Rivers region of Queensland are used in modelling the distributive consequences of different policy options dealing with water allocations, tariff structures and environmental flows. Two methods of water allocation are modelled, a single volumetric water allocation and a two-part water allocation. Both methods of allocation are examined with and without consumptive use. The alternative methods of allocation are combined with three tariff structures for charging for the supply of water, viz. a simple volumetric tariff structure, a two-part tariff structure and an increasing-block tariff structure. A sensitivity analysis is conducted to explore the stability of the results to variations in weather conditions, announced allocations and water price levels. The distributive consequences of three alternative environmental flow policy options are modelled, viz. recoupment of a proportion of traded water for environmental use, the government entering the market and acting as a player for water for environmental use and restricting the trade of water entitlements to ensure a minimum flow regime.

The results of the modelling suggest that a two-part method of allocation, with or without consumptive use, would best promote efficiency, social justice and environmental flow regimes in the particular water market. This method of allocation could be combined with a benefit pricing regime, although such a pricing policy cerates uncertainty of revenue for the water authority. If benefit pricing is rejected, then a increasing-block pricing regime could be adopted.

In terms of meeting the environmental flow regime, while balancing the objective of ensuring an efficient and equitable use of water resources, the recoupment of a proportion of traded water is preferable in terms of social justice to the government entering the market and purchasing water for environmental use. A problem in using cooperative game theory occurs when taking into account a particular flow regime. The interdependent relationship between all the irrigators and the flow regime in the river necessitates imposition of assumptions beyond those made in traditional game theory. Important among these assumptions concern the actions of irrigators outside a particular trade agreement; and this is seen as one of the areas requiring further research.

Overall, the study makes a contribution to knowledge and the debate on water management by demonstrating a method for examining water doctrines and policy options from a social justice perspective and provides a number of significant policy insights.

Keyword Water resources development -- Australia.
Water resources development -- Social aspects -- Australia.

Document type: Thesis
Collection: UQ Theses (RHD) - UQ staff and students only
Citation counts: Google Scholar Search Google Scholar
Created: Wed, 24 Nov 2010, 09:09:58 EST by Ning Jing on behalf of The University of Queensland Library