Do water markets “work”? market transfers and trade‐offs in the southwestern states

Many authors argue that markets will (and should) become a common means of transferring water rights in the western United States. Previous studies have estimated benefits from potential transfers and identified institutional arrangements conducive to market development. However, there is little published material that describes and evaluates existing markets. This article describes five southwestern water markets and evaluates market processes using transactions data from each study area. While the evaluation is necessarily preliminary due to the limited availability of data on market transactions, the markets analyzed here appear to be relatively efficient in allocating water between municipal and agricultural uses. However, nonconsumptive use water values and third‐party impacts not specifically addressed in state laws are poorly accounted for in most areas. Trade‐offs between benefits of market activities, opportunity costs related to market transfers, and transactions costs induced by laws and institutions are identified. These trade‐offs are a key issue facing policymakers who determine the roles that market and administrative processes play in water allocation.