Australia's water woes

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Felix Salmon weighs in on the unintended consequences of water pricing:

[P]ricing water can have interesting and not necessarily intended effects. In Australia, for instance, water rights can be traded. When the country was hit by drought, the price of those rights rose, and wheat growers started selling their water rights to the vineyards, because doing so was more profitable than growing wheat. And that, in turn, contributed substantially to the rise in global wheat prices.

The world would be better off right now if Australia's wheat growers had continued to grow wheat, and if Australia's wine growers had simply produced less wine. But that's not how the market incentives played out.

Well, the problem is about to get worse. The Australian government announced today it is buying $2.9 billion worth of water rights from farmers in an effort to safeguard drinking-water supplies. People have been predicting for years that water would become more precious than gold. Now, drip by drip, it's happening.