Since the closing years of the 1980s, Australia has adopted structural adjustment policies designed to foster economic liberalism based on the market system. Today, there is little economic protection for Australian agriculture and Australia is a persistent advocate of free international agricultural trade. The natural Australian environment is not very favourable for agriculture because of low and erratic levels of rainfall and poor soils. Scarcity of water in Australia is growing and its use has become a major natural resource issue. Water availability and use of water by Australian agriculture is discussed, its environmental impacts are considered and the scope for using market systems to allocate water effectively are discussed. Other environmental topics considered are water pollution and the use of chemicals in Australian agriculture, land clearing for agriculture and the environmental impact of pastoralism, soil degradation and reliance on genetically modified crops. Landcare Australia, an institutional initiative commenced in 1989 with the aim of promoting land conservation, is also examined. This program involves co-management between government and community groups (mostly of farmers) and community co-operation as a way to promote land conservation. It is not a market-based system. The view is expressed that market mechanisms are inadequate on their own for dealing with many environmental issues raised by agricultural development. Policy-makers need to consider a range of mechanisms, none of which are likely to be perfect.