ABSTRACT
This chapter examines whether alternative water allocation mechanisms can achieve levels of efficiency and productivity approaching those achievable through formal markets in tradable water rights. It also examines the efficiency of prices and quantities in the allocation of irrigation water. The chapter focuses on uncertainty in production and the assumption that the water agency has perfect knowledge of aggregate supply and demand. Two alternatives to formal water markets are assessed here: voluntary or passive trading, and allocation of quotas. The chapter compares the expected net benefits under the alternative systems. Water trading is in effect a partial substitute for farm-level water use efficiency. Moreover, the voluntary trading system has significantly lower transaction costs than formal markets in water rights. Historical water rights are recognized, and the marginal efficiency prices apply only to marginal water use, so voluntary trading introduces nonpunitive incentives compared to other water pricing schemes.
