ABSTRACT
Through water markets, buyers and sellers exchange right to use water at prices determined by supply and demand. The seller is willing to give up water because the buyer employs water more productively, and hence can pay a higher price. Compared to command-and-control policies, water markets should in theory be superior. When across-the-board water reduction of x% is imposed during a drought, in the absence of water market, both the most efficient water users and the least efficient ones are forced to reduce their water use. Water markets are also valuable beyond increasing water’s productivity through changing composition of economic activity. Water markets may further water productivity through technological change, innovation, or water-saving regulation. Well-functioning water markets presuppose a lot, and many factors beyond the markets themselves affect their operation and effectiveness. Because of the very location-specific context of markets, it is difficult to quantitatively assess the effectiveness and performance across water markets beyond high-level, and often mainly institutional comparisons.
