Academic journal article Forum for Applied Research and Public Policy

Water Marketing: Obstacles and Opportunities

Academic journal article Forum for Applied Research and Public Policy

Water Marketing: Obstacles and Opportunities

Article excerpt

New market-based management strategies may prompt conservation and lead to higher-value uses of water resources.

Freshwater is a scarce and often threatened resource throughout much of the United States, but particularly in the arid West. Supplies are being depleted or degraded by unsustainable rates of groundwater use, contamination, and damage to aquatic ecosystems. Meanwhile, demands for water are rising with an expanding population, higher incomes, and a growing appreciation for the services and amenities provided by streams, lakes, and other aquatic resources. But the options for increasing supplies are expensive relative to current water prices and are often environmentally damaging.

Providing for increasing water demands requires changes in how water has traditionally been managed and allocated among competing uses. There is a growing consensus that greater reliance on economic principles in managing and allocating water is critical for more efficient and sustainable use.

More than a quarter century ago, the U.S. National Water Commission's Final Report to the President and to the Congress made a strong case for facilitating voluntary water transfers to promote a more-efficient allocation of scarce water resources and to curb the perceived need for additional water supply projects. [1] In 1992, the International Conference on Water and the Environment in Dublin and the Earth Summit in Rio both endorsed viewing water as an economic good. Introducing economic incentives was also one of the core recommendations of the World Bank policy paper on Water Resource Management prepared that same year. [2]

In 2000, the World Commission on Water for the 21st Century concluded that we are on a path toward a water crisis and that business as usual is unsustainable. [3] The commission's proposals for changing course include recognizing that water is a scarce resource and that we need to manage it accordingly.

Water Markets

Markets and prices play a role in allocation of resources among competing uses, and they provide incentives to conserve and invest in new supplies. In a competitive economy, price adjustments and market transfers keep supply and demand in balance. Prices rise when demand increases faster than supply. Higher prices provide incentives to use less, to produce more, and to develop and adopt technologies that conserve use and increase output. Markets enable resources to move from lower to higher-value uses as conditions change. For example, water traditionally used for irrigation may be more valuable as a municipal water source as the demands of a nearby urban center increase.

Tradable water rights potentially can encourage conservation and a more economically efficient allocation of scarce water resources. Currently, water is underpriced and often allocated based on institutions established when water was not considered to be a scarce resource. Users pay nothing for the water itself. Municipal and industrial users typically pay a fee reflecting the costs of storing, delivering, and treating water supplies. But even these costs are likely to be subsidized for irrigation, which commonly represents a region's largest water use. Without an opportunity to sell unused supplies, irrigators have little incentive to conserve water. With the introduction of tradable water rights, however, users value water in terms of its opportunity cost--the value they could get by selling water--rather than at the subsidized price they pay for it.

In spite of their potential benefits and growing popularity, market forces have been slow to adapt to the reality of water scarcity. Efficient markets require well-defined, transferable property rights, and the full costs and benefits of a transfer must be borne by the buyers and sellers. Both the nature of the resource and the institutions that manage and allocate water can make it difficult to meet these conditions. …

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