Water markets as a response to scarcity

Abstract

Existing water governance systems are proving to be quite ineffective in managing water scarcity, creating severe risk for many aspects of our societies and economies. Water markets are a relatively new and increasingly popular tool in the fight against growing water scarcity. They make a voluntary exchange possible between interested buyers and sellers of water rights. This paper presents direct evidence from seven water markets around the globe to document key economic and ecological challenges and achievements of water markets with respect to water scarcity. We specifically approach water markets as localized cap-and-trade systems, similar to those for carbon emissions. We examine whether water use remains within the set limits on use of water rights (i.e., under the cap), the degree to which water markets help protect the health of ecosystems and species, and whether (as predicted by economic theory) the explicit pricing of water is accompanied by improving efficiency, as less productive water users decide to sell water to more productive water users.