Transaction Costs Emanating from Policy Flexibility in Water Markets

Abstract

This paper addresses these policy choices by using concepts drawn from New Institutional Economics. More specifically, we develop the notion of 'policy flexibility' as a transaction cost and analyse its impact on the permanent water market in New South Wales (NSW), the Australian State with the largest irrigation sector. Results drawn from a choice experiment reveal that 'policy flexibility' shifts the demand function for permanent entitlements to the left, thereby constraining the capacity of the NSW water market to generate surplus.