It would be foolish to focus solely on the successes of the water market in agriculture (particularly the temporary market) if the ambition is to gain lessons about the potential for urban water markets. If policymakers are seriously considering the usefulness of markets between urban water customers, a balanced view would also draw upon some of the acknowledged failings of Australia’s rural water trade.

There is little doubt that the major challenge confronting water markets in Australia has been the underestimated complexity of water-property rights. Commencing with the original decision to validate all sleeper and dozer rights under the Murray-Darling Basin cap-and-trade scheme, legislators have been constantly playing ‘catch-up’ in an effort to correct one property-right deficiency after another (see, for example, Quiggin 2001). For instance, the rights to return flows from irrigation continue to remain disputed and are largely misunderstood (or ignored) by those promoting the spurious concept of water-use efficiency. Similarly, the failure to account for the connectivity between surface water and groundwater with equally stringent regulation has left some jurisdictions with the formidable task of compensating irrigators for the impacts of multiple administrative failures — first, in the over-allocation of surface water and now because of the over-allocation of groundwater.

Defining water rights with precision is difficult enough in the first place, let alone when multiple jurisdictions are continually subject to pressure from various interest groups with a history of substantial use. The net result has been that demands on behalf of environmental interests, which are purportedly protected by legislation, continue to be undermined.

In addition to the major challenges of settling on adequate property rights and related enforcement has been the limited scope of these markets. In many respects this is the corollary of the strengths described earlier. For instance, the fact that most trade has occurred between agriculturists and thereby eased political resistance to the market approach has also constrained the effectiveness of the market to move water to higher-value uses in other sectors. This issue is given greater attention in the following section.