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With demand for water fast outstripping its supply, experts are turning to water markets as an innovative strategy to manage water. Like all markets, water markets allow for the trade-buying and selling-of water for commercial or noncommercial uses. The price of water in a water market is determined by the exchange of water rights. Such rights are either customary or established through laws and regulations and they define entitlements to and ownership of water.
Meeting demand by expanding existing water systems is becoming increasingly difficult due to prohibitive environmental and economic costs. In countries where water use exceeds its natural recharge, groundwater levels are dropping-reducing available water and raising the cost of pumping, or causing salt water intrusion and contamination. Moreover, water is highly underpriced, leading to wasteful practices and lack of funds to maintain water infrastructure. Experts, therefore, argue that pricing water is a good way to check demand and reallocate water from current uses for a more efficient management of the resource.
In developed countries, the most active forms of water markets are those where water for irrigation is sold to water districts under long-term contracts specifying the quantity to be delivered and its cost per acre-foot. Such markets are best established in the western United States (states such as Colorado, California, Utah, and Nevada). Many states in the U.S. Pacific northwest have also adopted laws facilitating the trading of water to increase in-stream flows. For instance, to protect endangered salmon, an environmental organization in Oregon pays farmers to use less water for irrigation so that more water is available in the rivers. However, water markets are still in their infancy and there are various factors that limit their growth. For example, buyers and sellers in water markets often cannot find trading partners or lack adequate market information on pricing and terms of trade. Moreover, to protect water rights, government agencies require all transfers to undergo an approval process, which can often be lengthy and expensive.
In developing countries, water markets have primarily emerged in response to the scarcity of water due to different reasons-harsh climate; drought; pollution; lack of access due to social, economic or political reasons; or the failure of public water providers. They operate at various scales ranging from private vendors who buy water from farmers and landowners and sell it at costs determined by distance and demand to multinational corporations that sell bottled water. In most informal settlements where there is little or no access to formal water supply systems, people depend on water vendors and often pay as much as 10 to 20 times more per liter. The regulatory framework within which water markets function in developing countries is weak and can often lead to groundwater overdraft where farmers and landowners are eager to make quick profits by selling large quantities of water. Since there is no mechanism to monitor the quantity of water being withdrawn, it is difficult to minimize wastage. Moreover, where property rights regarding water are less defined or enforced, it is very difficult to ensure responsible individual behavior.
More problematically, the record of implementing water markets in the developing world suggests that the outcomes for the poor can be disastrous. Privatization of water in Chile has led to some abridgment of access rights of poorer citizens. More dramatically, when the water system in Cochabamba, Bolivia, was privatized and put under the control of a consortium led by a global corporation, International Water Limited (IWL) (itself in-part owned by the U.S. company Bechtel Enterprise Holdings), prices quickly rose to a point that made basic access to water a near impossibility for some of the poorest citizens, and led to protests that paralyzed the city and government until a reversal of policy occurred. Water markets can therefore be quite controversial.
- William Easter, Mark W. Rosegrant, and Ariel Dinar, eds., Markets for Water: Potential and Performance (Kluwer Academic Publishers, 1998);
- V. Galaz, “Stealing from the Poor?: Game Theory and The Politics of Water Markets in Chile,” Environmental Politics (v.13/2, 2004);
- Ganesh Pangare, Vasudha Pangare, and Binayak Das, Springs of Life (Academic Foundation, 2006);
- Sandra Postel, Last Oasis: Facing Water Scarcity (W.W. Norton, 1992);
- Property and Environment Research Center, www.perc.org.