Because of the peculiar nature of water rights, we should look to market-based transactions as an economically efficient way to reallocate scarce water resources. Nevertheless, because of the need to untangle the hydrologic interconnectedness of water rights and the institutional connectedness of irrigators and delivery institutions in the West, transfers of water will always be expensive and time consuming. Whether municipalities purchase water from farmers and thus bear the transaction costs directly, or the private sector purchases agricultural water, bears the associated risk and transaction costs, and sells it on to municipalities, end users will inevitably pay higher prices for water. Droughts can focus public attention on the value of water and potentially increase willingness-to-pay prices that reflect the transaction costs of tangled western water markets.
Nicholas Institute for Environmental Policy Solutions