The Importance of Getting Names Right: The Myth of Markets for Water

Markets are now fashionable as institutions for managing water both nationally and internationally. True markets, however, have always been rare for water rights and there are good reasons for believing that they always will be. Water is an ambient resource where the actions of any one user necessarily affect many other users. If true markets are relied on to allocate water for particular uses and distribute water among users, the transaction costs of organizing contracts with all holders of water rights have been and will be prohibitive. Water therefore is the quintessential public good for which markets do not work. Treating water as common property causes a tragic over exploitation as soon as water becomes a scarce commodity. Market failure is also characteristic of treating the right to use water as private property. Public water management avoids these problems by treating water as a form of inherently public property for which basic allocation and distribution decisions are made by public agencies. Economic incentives, including fees, taxes, and “water banks,” are useful role in managing public property, but true markets must remain a phenomenon marginal to the enterprise of managing large quantities of water for the benefit of numerous users.