Using auction mechanisms to reveal costs for water quality improvements in Great Barrier Reef catchments in Australia

There is increasing interest in the use of market-based instruments such as tenders and trading systems to address water quality issues. While the focus is typically on the improvements in resource allocation that are generated, these instruments also play an important role in addressing issues of asymmetric information. The use of water quality tenders to reveal the opportunity costs of changing agricultural practices can help policy makers to understand the potential costs of misallocating public resources and to design better ways of achieving water quality improvements. This role of water quality tenders to reveal opportunity costs is demonstrated by reporting four pilot applications to improve water quality into the Great Barrier Reef in Australia. The results demonstrate the potential for opportunity costs to vary substantially between agricultural producers, and across industries, catchments and pollutants. The results from these case studies indicate that the most cost-effective water quality improvements may be generated from the horticulture and dairy sectors. In contrast, the opportunity costs of reducing emissions from the cane and grazing industries appear to be higher.