Stray thoughts on water markets.

I am delighted for this project in China, creating seven pilot water markets.  I hope we research them very carefully all along.

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It is worth remembering that part of the motivation of the Australian water market was to drive farmers out of farming.  Or at least to make them hate leaving farming less (comforted by the money from their water right).  It worked, too.  Irrigated acreage in the Murray-Darling Basin dropped by half in their drought, and is still only back up to two-thirds the pre-drought extent.  I don’t know how comforted they felt.

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I am starting to think that many of the people who advocate water markets are on autopilot, reacting to the 90’s when farm groups felt all-powerful and there was never going to be any possibility of reforming water rights.  It isn’t that they loved markets so much, but it was the sole hope of getting some water out of big boys in ag for cities.  If the big boys in ag made a killing selling cities water, well, that was a shame but it was the only possible way to move the water.  That dynamic doesn’t feel as strong any more.  Cities aren’t as urgent about getting more; they’ll look to their own sources (wastewater, greywater, desal) first to avoid the hassle.  Or we aren’t looking to move chunks of water around so much as facing the possibility of having much less water.  There’s much less water, but other mechanisms besides markets for leaving some instream (like the ESA).  Or the drought is raising questions of reforming the water rights system directly, rather than leaving them in place and moving water by markets.

Water market advocates!  If you haven’t revisited your reasons for thinking of markets as good policy for a few years, now would be a good time to double check them.  A water market may no longer be your best policy option.

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6 Comments

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6 responses to “Stray thoughts on water markets.

  1. I’m a water market advocate.
    (1) Yes, many markets are useful for reducing acreage (and potentially the number of farmers) in the least harmful and most efficient way. That’s b/c prices help people make decisions more than diktat.
    (2) I’ve also said many times that the govt has a right to curtail water rights when they conflict with the public interest. The Australian govt does this buy buying rights (bribes!) but also by reducing the allocation to each license (e.g., 60% of 1ML).
    (3) Markets are VERY useful for shuffling limited water among exiting farmers, thereby reducing the harm from drought and/or govt curtailments.
    (4) Markets are no substitute for regulations on pollution, g/w use, labor practices, etc. The gov’t has a big role to play (even if it fails to do so), but water allocation is not the best use of gov’t resources.
    Bottom Line: Exempt “social water” from private rights; allow trading of “economic” water; regulate to limit harmful behavior/spillovers.

  2. I am also an advocate of water markets, because fundamentally markets create a more efficient and equitable solution to the problem of water allocation during times of scarcity. As David noted, markets are not inconsistent with, and do not displace, the need for government to administer and enforce a water rights system. A market will allow the government to enforce its system according to an unbiased set of rules; without a market to reallocate water, the government is forced to take water from some right holders and reallocate it to others, based solely on who those people are or what uses they propose. That kind of favoritism can only lead to discontent with the regime. While no one may like water scarcity, at least they can recognize the efficiency and fairness of a market allocating water under those circumstances, rather than government fiat.

  3. One problem with markets is they often reward bad behavior. So we get situations where some of the worst abusers of groundwater amass money and political influence to buy surface water better used elsewhere. Market systems often promote harmful inequities. I agree that mixed systems involving government oversight are best, but we must remember that government today is often unduly influenced by those with money. Water behind dams and in rivers has already been “bought” and the effects are not good or “reasonable.”