14 Mar 2009

Water Markets

(via MA) you can read Jonathan Adler's a nice clear overview [PDF] of water markets. Adler is a lawyer, but he spends most of his time on economics, i.e.,
The demands of current and projected water management challenges can best be met through a greater reliance on water markets for water management. Specifically, water management must shift toward recognition of transferable rights in water that facilitate voluntary exchanges and the market pricing of water resources. While such reforms may be difficult and there are no panaceas for the water management challenges faced by the western United States, greater use of markets offers the best opportunity to adapt to climate change and its impacts on water supplies. Even the United Nations Intergovernmental Panel on Climate Change acknowledges that “improving the functioning of water markets could help create the kind of flexibility needed to respond to uncertain changes in future water availability.”

[snip]

Where an individual is using a transferable resource in an inefficient or wasteful manner, there is an opportunity for an entrepreneur to gain from acquiring the resource and putting it to better use. Where rights to water are transferable, water prices will reflect the value of alternative uses. That gives the rights holder an incentive to allocate the water to its highest-valued use. Transferability also creates substantial incentives for conservation, particularly insofar as rights holders can sell the water they conserve to other users. Such incentives can be quite powerful, particularly given the wide disparity between the prices agricultural users and others pay for water in the United States.

[snip]

The University of Colorado’s Charles Howe argues that so-called “salvage legislation” would dramatically increase the efficiency of water use, particularly in agriculture. In many states, farmers and other rights owners operate under a “use it or lose it” regime that only recognizes the validity of water rights for certain uses that are considered “beneficial.” A consequence of such rules is that there is little incentive to improve water use efficiency. Under “salvage legislation,” however, those who conserve water would acquire a valuable commodity: a transferable water right that could be sold or put to other uses. By ensuring those who manage to reduce their consumptive use of water do not suffer reductions in their water rights, “salvage legislation” would provide a substantial incentive to discover and implement water efficiency improvements.
Bottom Line: Clarify rights, create a trading environment, and watch markets make us ALL better off!

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