The dynamics of groundwater water markets: price leadership and groundwater demand elasticity in the Murrumbidgee, Australia

Abstract

Groundwater over-extraction is a problem facing many countries around the world. Water pricing and developing property rights to enable groundwater trade are potential demand-based approaches to address the over-extraction of groundwater resources. However, successful implementation of groundwater trading requires knowledge about groundwater demand and its interaction/substitutability with surface-water; and, given the paucity of empirical data on groundwater markets, price elasticity of groundwater demand is rarely estimated in the literature. We analysed 10 years of monthly surface and groundwater temporary market data (July 2008–April 2018) within the Murrumbidgee catchment of the Murray-Darling Basin, Australia, to explore a) the lead-lag relationship between surface and groundwater temporary markets; and b) the price elasticity of groundwater market demand. Results illustrate that surface-water markets show price leadership to groundwater temporary markets, and that groundwater demand is price elastic, with a –1.05 price elasticity estimate in our time-period.