Functioning markets allow resources to flow to their most highly valued use. Agricultural, commercial, and municipal users all compete for this precious resource. Unfortunately, when it comes to water, markets are often either non-existent or thin. Several legal doctrines present obstacles to water trading in the West. Reform of these once useful doctrines is important to allow water markets to flow.

 Key Findings

A complex web of private owners, water companies, irrigation and municipal water districts, water courts, state water engineers, and federal agencies allocates water in the arid western United States. In this complex system nobody is in charge, yet water is allocated, supplied, distributed, sold, rented, and consumed relatively seamlessly.

The property rights based system that operates in the West is very different than the one in the East. It is less centralized, and more based on property rights and markets. It arose in mining camps and among farmers and ranchers. It is flexible and adaptive as preferences and values change.

This report, published by the Regulatories Study Center at George Washington University, addresses the following:

  • How water institutions emerged in US history
  • Characteristics of effective institutions
  • Necessary conditions to allow for experimentation and adaptation
  • How private and political management organizations differ in their effectiveness
  • How the existing management institutions balance competing uses
  • How institutions address properly valuing water and balancing environmental and economic interests

 The greatest obstacle to successful water markets are rules that restrict  innovation and trade.

State courts and legislatures define what uses constitute “beneficial uses,” a political definition of how water can be used. Governments also provide subsidies that encourage water applications in less valuable uses. As courts and state legislatures have expanded standing to those objecting to to changes in uses, a tragedy of the anticommons emerges where too many layers of approval exist to make it profitable to invest in exchanging water rights. A related challenge is the expansion of the public trust doctrine, a principle claiming that some resources are held “in trust” by governments and cannot be allocated privately. The public trust doctrine threatens water rights and effective water management because it creates uncertainty about rights.

Water institutions in the American west evolved from the eastern riparian system. In the east, water was plentiful, but in the arid West water scarcity drove adaptation and development of the system of prior appropriation. Effective institutions are able to adapt to changing environmental and market conditions. They are responsive to the needs of the users who depend on them to lower transaction costs and facilitate exchange. When these systems were allowed to evolve and adapt to local circumstances they succeeded, but government rules are slowing adaptation and innovation.