The Murray-Darling Basin Plan and public policy failure: A transaction cost analysis approach

Abstract

Australian governments have increasingly relied upon water markets to reallocate water between consumptive and environmental uses. Such markets appear appropriate for facilitating consumptive users’ adjustment to factors such as drought. However, where effective institutional arrangements remain elusive, markets alone will be insufficient to provide environmental water reallocation. A basin-wide planning approach represents the Australian Government’s strategy to replace diverse state water-sharing plans, address over-reliance upon markets and take in hand institutional failure. Given its previous inability to deliver environmental reallocation, this paper applies McCann and Easters’ transaction cost typology and Williamson’s transaction costs analysis framework approach to evaluate alternative Basin Plan institutional structures, and determine if efficient institutional approaches to water-reallocation are possible. We find that while efficient institutional alternatives are feasible, careful attention to design is required. This involves consideration of environmental property rights, statefocused incentives and appropriate use of existing market institutions.