Water Reallocation in the West: Government and Markets

Water is multifaceted: it is a human right, a production input, a sacred element, an investment asset, public property, and a fugitive resource. Its reallocation is inherently difficult because of its natural characteristics and its hybrid nature that combines public ownership with private rights. The future of the U.S. West necessitates the reallocation of water resources, even with potential new water supplies. As climate change intensifies, reallocation will take various forms—all involving government intervention to some degree, from eminent domain to competitive markets. For water markets to function effectively, they require robust institutional infrastructure to prevent issues like imperfect information and market abuse. Water markets often spark controversy, particularly with the recent involvement of large financial actors in water rights transactions. Australia’s experience shows that an active water market, while not without challenges, can alleviate the costs of drought. This example also highlights the necessity of regulating markets to ensure fair competition as they grow more active and complex. While speculation poses a risk, the solution lies in regulating market practices rather than abandoning water markets. We cannot throw out the baby—water markets— with the bathwater—the unsavory market practices some may engage in.