Before we discuss water markets, we need to understand water rights, i.e.,
Clear water rights: This means that people overlying aquifers have a defined but limited right to withdraw water. Without this adjudication of the water in the aquifer, everyone has an incentive to overpump (before a neighbor does), and the aquifer will drop too fast/crash.
Surface water rights (to streams or irrigation canals) need to be specified as consumptive or diverted. If they are consumptive, that means that 100 units of water are taken away and never come back; if they are diverted, that means that 100 units are taken away, but some (unknown) quantity will flow back to the stream or into the ground.
Many problems with water rights originate in this distinction, i.e., I cannot sell 100 units of diversion rights if that water is going onto a truck that will leave the area. Even worse, diversion rights ?consume? different quantities of water as place, temperature, crop, irrigation method, etc. changes. That?s why they are hardly ever moved around.
Water rights need to be specified as ?paper? or ?wet?, i.e., paper rights may exist on paper (duh!), but they do not exist in reality. Wet rights, OTOH, mean rights to flowing water. The Western US is full of examples of where a river was overallocated and some rights turned out to be paper instead of wet.
The original allocation [hyperlink] of Colorado River water?15 million acre feet?was based on a flow of over 16 MAF. Unfortunately, it seems that average flow on the Colorado is 14.3 MAF. Oh, and Mexico was supposed to get the extra water. Too bad, amigos.
Bottom Line: Property rights must be clear before water can be traded.
?aguanomics.com