# Water trading Canonical: https://web4.xpay.bi/en/wiki/wp-en-7852580/ Language: en Published: 2026-10-29T22:10:06.230Z Updated: 2026-10-29T22:10:06.230Z Water trading is the process of buying and selling water access entitlements, also often called water rights. The terms of the trade can be either permanent or temporary, depending on the legal status of the water rights. Some of the western states of the United States, Chile, South Africa, Australia, Iran and Spain's Canary Islands have water trading schemes. Some consider Australia's ## Key facts ## Overview Water trading is the process of buying and selling water access entitlements, also often called water rights. The terms of the trade can be either permanent or temporary, depending on the legal status of the water rights. Some of the western states of the United States, Chile, South Africa, Australia, Iran and Spain's Canary Islands have water trading schemes. Some consider Australia's to be the most sophisticated and effective in the world. Some other countries, especially in South Asia, also have informal water trading schemes. Water markets tend to be local and informal, as opposed to more formal schemes. Some economists argue that water trading can promote more efficient water allocation because a market based price acts as an incentive for users to allocate resources from low value activities to high value activities. There are debates about the extent to which water markets operate efficiently in practice, what the social and environmental outcomes of water trading schemes are, and the ethics of applying economic principles to a resource such as water. In the United States, water trading takes on several forms that differ from project to project, and are dependent upon the history, geography, and other factors of the area. Water law in many western U.S. states is based in the doctrine of "prior appropriation," or "first in time, first in use." Economists argue that this has created inefficiency in the way water is allocated, especially as urban populations increase and in times of drought. Water markets are promoted as a way to correct these inefficiencies. In addition to the supply of tap water, many local water resources are also being acquired by private companies, most notably Nestlé Waters with its numerous brands, in order to provide commodity for the bottled water industry. This industry – which often bottles common ground water and sells it as spring water – competes with local communities for access to their water supplies, and is accused of reselling the water at drastically higher prices compared to what citizens pay for tap water. ## Water trading markets Water trading is a voluntary exchange or transfer of a quantifiable water allocation between a willing buyer and seller. In a water trading market, the seller holds a water right or entitlement that is surplus to its current water demand, and the buyer faces a water deficit and is willing to pay to meet its water demand. Local exchanges that occur for short durations between neighbors are considered "spot markets" and may operate under rules different from water rights trading markets. ## Economic theory Economic theory suggests that trade in water rights is a way to reallocate water from less to more economically productive activities. Water rights based on prior appropriation – first in time, first in right – led to inefficient water allocation and other inefficiencies, like overuse of land and less adoption of water conservation technologies. For example, it has been observed that urban users can pay up to 10 times more for water than agricultural users. Alternatively, water markets should provide a clear measure of the value of water and encourage conservation. Water trading can be a solution because marginal prices for users will be equalized and one price would allocate water according to each users demand curve; additionally information about the value of water in different uses will result, and compatible incentives will be created. Studies have shown that only modest transfers of water (10%) from agriculture to urban areas would be needed to bring allocation of developed uses into economic balance. Potential environmental benefits of trading can also include improved instream water quality, because water will not be diverted to the least economically productive users. Trading also re-allocates risk, whereas the prior appropriation system inefficiently and unequally allocates water and risk among similar users. Water trading should be Pareto efficient, which means that the socially optimal water allocation is an allocation such that no person can be made better off without making someone worse off, and includes compensating transfers of money to losers. The socially optimum level is where water is allocated to those who value it most, though this can be contingent on reallocation in drought years. However, it is frequently not practicable to compensate losers from water transfers because of the difficulty of identifying them, or they may be located in different legal jurisdictions. Economists acknowledge that the final results of a water trading market and how they are achieved are important policy questions. ## Conditions for a water trading market The aforementioned benefits of water trading are improved as the following conditions are met: Voluntary buyers and sellers: Parties interested in buying must have access to water rights and those interested in selling their entitlements must be allowed to do so. Allocation of vested rights: In order to achieve efficiency in the distribution and use of water rights, available sources must be allotted to specific parties. While owners do not own the water itself, they do own the right to use the water. These property rights are established by a governing body and in many cases are available for sale or for lease. Information: In order to function efficiently in a market, participants must know their own estimated costs. One who owns the water rights of a specific area must know the quantity of water needed, the value of that water, and the point at which additional consumption of water is no longer beneficial (ex. Land has been fully irrigated and additional water would be detrimental). Clear definition of rights: This refers to measurement of bodies of water accessible by the rights’ holders. Bodies of water must be consistently identified, including the source of water body as well as measurement (acre/ft) of "right to use." Lack of clarity on permits or water rights allocation may lead to lost, null, or void transactions. Transferable from land rights: In reference to water ranching, water trading will be most efficient when access to water is independent of the land. Buying and selling of rights becomes less complicated when one is not considering the sale or lease of water and land. Changeable types of water use: As agricultural users of water rights are electing to sell or lease these allotments, the destination of the water will vary. It is necessary that transferred rights may be redeemed for whatever agricultural, municipal, industrial, or residential purpose it is assigned. ## Types of trades Several types of stakeholders are recognized as potential participants in a water market, including agricultural users, industrial, and urban, as well as those who value in stream uses for recreation, habitat preservation, or other environmental benefits. Water rights holders – particularly agricultural users – can make water available for trade by employing water conservation technology, through permanent fallowing, seasonal fallowing, shifts in crop choice, or voluntary water conservation (for example, residential water conservation practices). Trades can then be long-term leases, permanent transfers, short-term leases, or a callable transfer, which is the ability of a city to lease water under specified drought conditions. There are other flexible trade tools used by urban areas, such as water leasebacks, wherein the municipality purchases the water right from agricultural users and then can lease it back to those users in non-drought years, as a way to ensure the urban water supply. Banking water is a related tool, wherein water is stored underground in non-drought years to be used in drought years, though this is not to be confused with water banks, which are brokering institutions. Water ranching is a method of accessing unclaimed water rights that are legally bound to land rights. While many areas have detached these two types of rights from one another, some still prohibit the severing of rights and thus continue to promote water ranching. In the event of water ranching, the groundwater removed from the property is often much greater than that which would be used for average agricultural use, which can be harmful to the ecosystems which rely on it. This practice also creates inefficiency in the dispersal of land and water access ownership, as non-agricultural parties, such as municipalities, may purchase a plot of land simply for its water. Water credits: The idea is to have a tradable certificate which notifies the quantity of water saved by an institution, organization or an individual this would help in maximum utilization of every available drop of water. It may be defined as a permit that allows the holder to trade the conserved water in the international market at their current market price. ## Justification for water trading markets Establishing a water market may be an appropriate solution for the problem of distributing scarce water resources among increasing demand, depending on the historical, political, legal, and economic context of a community. For example, where prior-appropriation water rights dictate freshwater allocation, such as in the Western United States, new consumers may have little recourse to obtain sufficient water quantities to meet their demands without the use of water markets (alternatives to water markets are discussed below). Thus, historical appropriative rights might neglect consumers willing to pay more than current consumers. Water trading serves as a mechanism to promote the distribution of rights to those who value them most. Also, instream demands (that reflect the benefits that fisheries and lentic and lotic ecosystems receive from greater water flows, as well as benefits to water-dependent recreational activities or aesthetic appreciation) might be ignored in an appropriative system. For example, institutions governing water resources in the US have historically favored water allocation to uses that stimulate the economy, such as agricultural, hydroelectric, or municipal application. Correspondingly, western water law evolved to encourage water diversion offstream; water left instream was considered "wasteful" and so instream water demand was ignored. There are multiple manifestations of water rights. Most commonly, water rights fall into the categories of prior-appropriation water rights and riparian water rights. Prior appropriation dictates that the first party to use the water for beneficial use maintains right to continue using it in this manner, unless they elect to sell or lease these rights. Riparian water rights are allocated to parties in ownership of land adjacent to a body of water. Frequently with riparian rights, the water rights cannot be severed from the land rights, and the water found within may not be transferred outside the watershed of origin. Both of these types of water rights are divided into "senior" and "junior" rights, appointed by the order in which they were allocated. The senior rights holders receive their water first, to be followed by the junior rights holders, and ideally there would be sufficient water for each party to redeem their allotments. In the absence of water trading, a drought may cause rights holders to lose their full access. In these drier seasons, it is possible for governing authorities to curtail junior water rights for a period of time to allow senior rights holders to redeem their full quantities through a process called priority administration. Where water is scarce, tradable water rights may incentivize water conservation and make more water available for trading. Using the western appropriative rights system as an example, water rights are usufruct, indefinite, and senior or junior rights holders may forfeit their rights if they do not use their full water allocation for beneficial use (criteria for forfeiture and definition of "beneficial use" varies by state). Because rights holders do not "own" water rights, but merely consume water, they bear no cost for overconsumption, and may consume more water than needed to avoid forfeiture. Agricultural water users may intentionally apply water to low-value crops or water-intensive crops to justify and maintain their current water allocation. Thus, tradable rights may also encourage agricultural production of more high-value crops and/or less water-intensive crops. In the case of the western United States, as of 2006, irrigators typically consume more than 80% of freshwater, and so water trading markets could reallocate water to urban, environmental, and higher-value crop uses, where water is valued greater at the margin. Water markets may be appropriate where there are no or inefficient rules established to govern groundwater use. Because groundwater is generally available to anyone who sinks a well and pumps, water tables worldwide have fallen precipitously in the last several decades. Diminishing aquifers and lower water tables are a concern because aquifers are relatively slow to recharge, and lower water tables can lead to salt intrusion and make freshwater unfit for consumption. Generally, water markets are considered flexible instruments that, in theory, should adjust for changing prices, and respond to changing markets conditions (e.g. less rainfall, increased demand). Historically, certain communities, such as those in the western United States, may have responded to water shortage and increasing demand through supply-side solutions, like increased storage capacity and transportation infrastructure (e.g. dam and aqueduct construction). Due to higher capital costs, decreasing sites for dam construction, and increasing awareness of environmental damage from dam construction (consider impaired Northwest salmon runs, for one example), water markets may be preferable to supply-side solutions that are not viable or sustainable in the long-run. For the water storage and transportation infrastructure that still exists, water markets may shift the financial burden of maintenance from government agencies to private sellers and buyers that participate in water markets. ## Role of institutions Empirical research established that outcomes of long-term sustainability and successful management of common pool resources (CPR) depend on the governing institutions involved, and that no single type of institution or management system uniformly manages common pool resources optimally across all scenarios. A CPR is "a natural or man-made resource system sufficiently large as to make it costly (but not impossible) to exclude beneficiaries from obtaining benefits from its use"(). Water is inherently a common pool resource; however it takes on qualities of a private good when property rights are assigned and its consumption becomes both rival and excludable by a water rights holder. Still, water is not a pure private good when property rights are assigned because non-water rights holding beneficiaries can access water upstream. Irrigation water will also percolate and recycle back to the stream so non-water rights holding beneficiaries downstream will benefit from return flows. Thus, water retains certain common pool resource qualities even in a water trading market and must be managed as such. In the world of common pool resources, an appropriator is a person who withdraws from the resource system, providers are agents who arrange the provision of a CPR, and producers construct, repair, or take action to ensure long terms sustenance of a CPR system. Also bearing on water trading markets, Garrett Hardin suggested common pool resources will terminate in a "tragedy of the commons", where all appropriators will continue to consume common pool resources to maximize their individual utility without considering social utility or cost: "Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons". To redress this, one traditional scheme for common pool resource management is a "Leviathan" strategy, in which a central authority (like government) must enforce rules, and coerce and punish appropriators as necessary to obey resource rules; however a large enforcer cannot catch all offenders or obtain complete information so the Leviathan strategy is not a perfect solution. The second traditional scheme for common pool resource management is privatization, in which resources are tangibly divided and exclusively managed and consumed by individual entities. However, privatization is not a perfect solution because it erroneously assumes when the resource pool is divided, all resultant units have equal value. As an alternative, Elinor Ostrom posits common pool resources are embedded in complex, social-ecological systems and can be managed by nested or polycentric public enterprises, where institutions at different scales (e.g. national to local hydrologic basin) horizontally and vertically collaborate to sustainably manage a common pool resource. External enforcers do not necessarily need to monitor and enforce penalties; rather, participants can internally monitor appropriations and levy sanctions. Also, those internal actors who know best about costs and benefits of local resource appropriation participate in management. Case studies below provide examples of the role of institutions in specific water markets, however the combination of institutions involved in water allocation distribution will carry unique capacities and constraints. ## Complications in water trading markets Impediments to the development of water markets include the fact that water is largely a public good, and water rights rest with a governing body while individuals essentially have "use" rights. In addition, water is not a standard commodity, rather the water supply is stochastic and flows through complex natural and manmade systems. Thin markets with few participants can result from fluctuations in water supply. Transaction costs for water trades can be high because of the need to physically transport the water and the required administrative approvals, which may not be given because of externalities to third parties. Additionally, institutional features affect transaction costs, such as the structure of the water district, the water rationing mechanism, and other rules such as return-flow requirements. These institutional structures have been observed to form in the early stages of a project and to resist change, because investments that are often irreversible are made by stakeholders and third parties based upon these institutions. ## Third party effects Third party effects of water trading can be positive or negative and will occur when the benefits or costs of a trade accrue to persons besides the buyer and seller involved in a water right trade. Examples of third party effects include: Unreliable supply: Relates to the probability a water rights holder will receive expected allocation in a given water year. This probability of receipt is dependent on natural variability of water supply (e.g. drought, irregular rainfall), governing institutions that manage water allocation, storage and conveyance losses (e.g. from evaporation or seepage), and access to return flows. Delayed delivery: Relates to the capacity of water storage and transportation infrastructure and the fact such infrastructure are congestible goods. During peak demand times, infrastructure may not have the capacity to store or deliver water demanded by all users in the moment they demand it. However, because water demand is seasonal (e.g. greater demand in hotter or drier months), it may not be cost-effective to augment infrastructure to meet peak demand level year round. Thus, some users may not receive their water allocation when they need it most. Unaccounted costs of storage and/or delivery Again, the time of year, location, and elevation are important because water is non-compressible (unlike something like natural gas) and cannot be cheaply stored or transported long distances or elevations. Water quality: Return flows can improve or reduce water quality depending on the location of the origin and endpoint of water traded. Fishery degradation: Reduced flows from water allocated offstream can negatively impact fishery health. Area-of-Origin effect: Relates to a chain-reaction of decreased local economic activity and a diminished tax base in the geographic area of water traded when water traded lessens the agricultural or industrial water rights holder's economic activity. Academic consensus is that the area-of-origin effect exists, but the magnitude of its impact ranges and is widely debated. ## Barriers to trade The following factors may impede trading in a water market: High infrastructure costs or constraints: A great deal of physical infrastructure is required to move water long distances to reallocate it to its most valued use from a seller to a buyer, and allow markets to form and succeed. Most often the capital to build elaborate canal and ditch infrastructure is provided and maintained by a government entity. High transaction costs: The transaction cost of trading in a water market is the sum of the cost of obtaining information, search cost of finding willing traders, negotiation cost of achieving mutually beneficial trades, cost of effecting and registering trades, and cost of enforcing trade contracts. Increasing the geographic range of the trade and number of stakeholders involved tends to increase the transaction cost of the trade. Legal barriers: In the United States, federal regulations under as the Endangered Species Act, Public Trust Doctrine, or Clean Water Act, which can require minimum flows to protect a species or maintain water quality, may prevent trades offstream (for example, see court protection of the Hypomesus transpacificus in California. System of water rights: If there is a rationing system in which senior rights users get all of their allotment before junior rights users get any of theirs under drought conditions (priority system), there is little incentive for senior users to conserve if they can't easily trade water to other users. This complicates trading because heterogeneous rights must be quantified and priced for each trade, and is less adaptable to short run changes in supply. Political and social barriers: In order for a water market to realize success, multiple factions within society must be able to view water markets as serving social values and objectives. Given the array of societal factions though, sometimes with competing values or objectives, water market approval needed across multiple groups may be difficult to achieve. Stakeholders involved in the market must agree on and adhere to rules governing trade for effective and efficient Coasean bargaining to occur. Elected political leadership may be unwilling to support water markets, support trade-enabling laws, or raise water prices to reflect scarcity conditions if constituents disapprove. Political leadership must also mutually define desired policy outcomes of water markets and water market administration must be feasible and sustainable to achieve the desired policy outcome. Finally, although water allocation dedicated to environmental use is increasingly recognized, stigma against "nonconsumptive" water use may persist in communities that have historically viewed water left instream as wasteful because it does not contribute to economic welfare. ## Other considerations Equity: Besides resource allocation principled on economic efficiency, water allocation based on social equity concerns of fairness and water access for all, irrespective of individual ability to pay, is another consideration in water distribution. Distributing water to achieve social equity will exclude economic efficiency if government provides subsidies, free services, or administratively sets water pricing to make water available to those not able to pay market price for water. Equity is also a concern for water markets in the sense participating buyers and sellers should perceive equal opportunity gains in a transaction (which theoretically should occur if water is priced according to the equimarginal principle). Pricing: Marginal price in a water market should reflect parity between the marginal willingness to pay of all consumers in the market (i.e. the marginal social demand) and the marginal social cost of provision (that accounts for private costs, externalities to third parties, storage and conveyance costs, and resource scarcity). However, in practice, water is often administratively priced by management institutions, who are reluctant to raise prices to reflect water scarcity, so water is under-priced and over-consumed. Because administrative prices are not determined by market conditions, they do not automatically respond to changes in long-term or short-term supply, and can be set at a variety of levels (such as short-run marginal cost or long-run marginal cost, with varying assumptions about fixed or variable demand and costs) that are not Pareto efficient. One challenge in quantifying an accurate social marginal price involves difficulty in measuring the price elasticity of water. Determining price elasticity for the agricultural or industrial sector can be difficult because water use might not be metered or water is free. The marginal value of instream demand requires nonmarket valuation techniques such as recreational demand models, contingent valuation or hedonic housing models. Yet as the diversion of water offstream increases, the marginal value of water left instream will increase and nonmarket valuation techniques will only reflect a static price. Municipal water demand elasticity is also difficult to measure because historically municipal water is under-priced and set at the long-run marginal cost of supply. Evaluation: Trade volumes may not tell the whole story about the efficiency or importance of a water market. A low number of trades does not necessarily indicate an inefficient water market, nor does a high number indicate efficiency. Actual trade volumes have been relatively low in studied water markets. Outside of the U.S., in Australia, 51 inter-state trades took place between 2000 and 2002. Yet within the Australian state of New South Wales, even though water trading has existed since the 1980s as a way to address droughts, the market is still thin and exists mostly within the irrigation sector. In Chile most trades take place in Santiago or in the desert north. In the U.S., between 1990 and 2000 in 19 western states there were 1,065 sales and 552 leases of water rights, but the majority of the sales were in Colorado in relation to the Big Thompson Dam Project. In general, efficient water markets trade in homogeneous water shares, many buyers and sellers, ease of entry and exit, and low transaction costs, all of which depend upon the particular market's structure. ## Alternatives to water trading markets Where water markets are either not viable or desired, the following mechanisms may be used to allocate scarce water resources: Administrative transfers (also called "public allocation") Forfeiture or abandonment of water rights, as determined by governing institutional law Government exercise of eminent domain Legal challenges to existing water allocation Legislative settlement Reallocation of water via redesign of large-scale water projects Marginal-cost pricing User-based allocation ## Sources - Water trading · Wikipedia: https://en.wikipedia.org/?curid=7852580 Source: Wikipedia contributors — https://en.wikipedia.org/?curid=7852580&oldid=1363641383 Licence: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation notice: Reformatted for XPay; the source may be abridged, restructured or translated. Consult the cited revision for the original.