Why Water Markets Are Not Quick Fixes for Droughts in the Western United States

by Charles J. P. Podolak; Martin Doyle

Jan 1, 2014

Water in the western United States can be bought and sold, but the transactions will always be complicated. Transfers of water will always be expensive and time consuming because of the hydrologic and institutional interconnections inherent to water. Our data show that most of the water rights in the West are messy. Therefore, markets cannot be quick fixes, and using markets for future water allocation, even if it is economically efficient, will take time and resources to set up. Untangling serial uses and negotiating multiple ownership claims are hurdles, not barriers, and they can be overcome in time but will require both time and money. Buying existing water rights may be less costly than building infrastructure to transport available water from long distances or desalinating seawater, but the transactions will come at a price. Municipalities may purchase water from farmers and thus bear the transaction costs directly, or the private sector may purchase agricultural water (e.g., Two Rivers Water and Farming, Colorado (Landry 2012)), bear the associated risk and transaction costs, and sell it on to municipalities. In either case, the end users will inevitably pay higher prices for water. Markets can and will be part of western U.S. water allocation, but they do not provide quick solutions. Droughts can focus public attention on the value of water and potentially increase the willingness-to-pay prices that reflect the transaction costs of tangled western water markets.

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