Experimental Economics and Water Policy

Experiments in economics and their application to policy design continue to gain increasing popular appeal. Australia is investing in training, capacity building and international partnerships to bring these skills to our policy makers. Economic experiments are used to test policy-related hypotheses: to examine the behavioural processes upon which the policy is built, identify policy bugs, confirm incentive mechanism performance, investigate new decision processes, and illustrate economic allocation systems to stakeholders. Experiments provide a new source of information to improve policy design. This paper explores a set of experiments conducted for the National Action Plan for Salinity and Water Quality Market Based Instruments Pilots Program. The experiments test bed water and salt markets. The pilot region is the Sunraysia in northern Victoria, Australia. The paper looks at, -How economic experiments can answer policy questions important for field implementation, using the questions posed by stakeholders in Sunraysia. -How economic experiments complement economic theory, using examples from the salinity and water allocation problem in Sunraysia. -Provide examples of other water policy experiments. These experiments address water allocation questions important to Australia. The objective of the paper is to reveal both the strengths and limits of economic experiments for policy. The paper is based on my experiences using experiments for policy design in the role of a research economist for government and as a PhD researcher at University.