The notion that the free markets will allow a sharing out of water in an efficient way, a basic operation in microeconomics, is not valid in the case of water. For this to happen, the markets need to be competitive, with many small buyers and as many small sellers. And, secondly, all the social benefits in the costs related to water should be reflected in the price – and this has to happen; but this not the case with water, where everybody knows that its use has important environmental consequences and it is something that can not be left to the private markets. It does not matter how competitive they are, there should always be a certain governmental control. For example, the majority of governments agree that it is not a good idea to let their citizens die of thirst, or to be less dramatic, that everyone has the right to a minimum quantity of water. However, it is not obvious that the free, private and competitive markets are going to take care of this, particularly in times of drought. This is the scenario for which the private water markets are not ready.Whew! I thought my ideas were off, but I advocate environmental set-asides, minimum allocations to humans, and competitive auctions.
I guess I still have a chance with MIT :)
Fisher goes on to say that "water wars" will never happen (and have not happened) because water is not valuable enough to justify the cost of fighting. That's true for countries but not for tribes. I am also not so optimistic about [cost/benefit] rationality wrt wars -- governments have often started wars for irrational reasons.
Bottom Line: Reallocation of water needs to take public and private interests into consideration, but there are ways to use market forces (willingness to pay) to do so.