This paper reviews the constraints of trade within a non-point source water permit market. Having developed a theoretical model of the agricultural firm’s decision between their primary production activity (growing crops) and selling permits, an agent based model is employed to review the models sensitivities using a representative region of the Murray Darling basin. In developing the model, the price differential between the respective crop price and the water permit price, as well as the water intensity of these crops, are identified as important determinants in the decision to trade permits. In addition to these variables and traditional determinants of trade (such as transaction costs), the diversity of the region (i.e. the mixture of potential buyers and sellers of permits) is important in fostering successful trade. Extensions of the model incorporate issues of monitoring and enforcement, as well as potential test-bedding of alternative market designs.

This seminar has been jointly organized by FEEM and IEFE, Bocconi University.