PRICES, PROPERTY AND MARKETS IN WATER ALLOCATION

Abstract

Abstract This paper examines the means to incorporate the use of market signals through prices into water resources management with the objective of improving efficiency in the allocation of water. It reviews a vast body of recent literature on tradable resource use rights as well as actual experiences with implementing tradable water rights programmes both in Latin America and in the rest of the world. The issues discussed include the conditions required for a well-functioning water market; the potential strengths and weaknesses claimed for markets as a means of water allocation; the characteristics of the operation of a water market; types of transactions; the initial allocation of water rights; design issues, including permanent and time-limited water rights, and hydrological security and allocation rules; the limitations of markets and the factors that can adversely affect their performance, including externalities (return flow, instream and area-of-origin effects);, market power, transaction and transportation costs, and steps to mitigate them; and opportunities for expanding the role and scope of water markets.