An Economic Model of Spatial and Temporal Water Trade in the Australian Southern Murray‐Darling Basin.

Within the Australian southern Murray‐Darling Basin (sMDB) water markets have become a key institutional response to water scarcity and environmental problems. These markets facilitate trading of water among many users and across multiple connected regions. Increasingly, these markets also support intertemporal transfers via the carryover of user water allocations within public water storages. While trading can improve the spatial allocation of water, carryover can improve the temporal allocation by ensuring storage reserves reflect prevailing user preferences. This paper presents an economic model of water markets and irrigated agriculture in the sMDB. A reduced‐form statistical model of water demand is estimated using historical irrigation and water market data. This statistical model is placed within an economic partial‐equilibrium framework accounting for both interregional trade and interyear carryover. The model is solved numerically for a dynamic market equilibrium given assumptions over future stochastic water supplies. Out‐of‐sample tests show the model can realistically simulate water market prices and irrigation activity across the basin. The model is applied to estimate the economic benefits of interregional water trading and interyear carryover. Results show around a third of the economic benefits of water markets in the region can be attributed to interyear carryover. Plain Language Summary: The southern Murray‐Darling Basin (sMDB) is an important river system in Australia. Water from this river system is used both for irrigation farming and to support the environment. Water markets have been introduced allowing water users (farmers) in different parts of the river system to trade water among each other. These markets also allow farmers to store any unused water in dams for use in future years. This study presents a model of water markets in the sMDB. This model is developed using historical data on water supply, farm water use, and water market prices. The model can be used to simulate outcomes in the region's water market, given assumptions on the supply of water. Testing shows the model can produce results that are consistent with historical data. The model estimates that water markets generate benefits for water users of around $AUD172 m per year: around 14% of the value of water in the region. The ability to hold unused water in dams accounts for around one‐third of these benefits. Key Points: An economic model of water markets in the Australian southern Murray‐Darling Basin is developedThis model accounts for both interregional water trading and interyear water storage (carryover)Water markets are shown to generate significant economic benefits with around a third from interyear carryover [ABSTRACT FROM AUTHOR]