Efficiency criteria for market transfers of water

Adjustments of water between uses and areas of use is essential for the public interest in economic efficiency because of changing demands for water, differential rates of regional growth, and limited supplies. The physical aspects of water supplies give rise to rather complicated legal rules regarding property right management, particularly where transfers of ownership are attempted between uses and areas of use. Transfers entail effects on third party users, and the present legal restrictions on transfers do not lead to an economically efficient use of water. Application of marginal efficiency conditions to a water transfer and consideration of physical interrelatedness effects indicate that present procedures take into account protection of losers but do not allow for compensation from third party ‘gainers.’ Conclusions from an economic analysis of the transfer problem indicate that the benefits from the interrelated use before and after the transfer must be taken account of in specification of legal rules. Adoption of such rules would be necessary for efficient market allocation.