Water markets have great potential to increase the efficiency of water use. However, the very process of transferring a water entitlement can result in third party effects. Specifically, there are three types of impact that can affect the entitlements of third party irrigators: volumetric reliability, delivery reliability and water quality effects. In each case, policy makers must decide whether they will try to prevent the impacts and whether they will force traders to internalise third party effects. Potential strategies range from non-interventionist options, such as restricting trade, to market interventions, such as exchange rates, which adjust traded entitlements to account for volumetric externalities.

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