Innovative Approaches to Water Allocation: The Potential for Water Markets

Exchange through markets is one way of allocating water. In many settings this method possesses a number of desirable attributes to a greater degree than alternative allocative mechanisms: flexibility, security, predictability, fairness …. Markets have shortcomings, too, especially related to quantity and quality return flow effects, but these can be mitigated through changes in the administrative framework of the water rights system. It is shown that an economically efficient water allocation system must integrate quantity and quality management and would be neither a priority nor a proportional rights system. However, the nature of the water rights system may not be very important if short‐term rental markets are operative. The potential for intrastate and interstate water markets is discussed.