Missing Water Markets: A Cautionary Tale of Governmental Failure
86 Pages Posted: 11 Mar 2014 Last revised: 13 Oct 2016
Date Written: September 9, 2015
California is facing a water crisis. Water is managed through a variety of mechanisms, including government administration and market tools. This Article argues for a regulated market-based solution. When it comes to water markets, the invisible hand needs help from the visible hand of government to prove effective. Administrative systems and markets are usually portrayed in opposition to each other, as mutually exclusive solutions. Water market advocates suggest government’s role is minimal. However, as this Article identifies, to establish and maintain a functioning water market, government needs to play a variety of roles. These include the uncontested role of defining property rights, but additional roles are necessary such as reviewing transactions to prevent uncompensated externalities, structuring the management of water infrastructure and fulfilling the market maker role.
This Article presents a taxonomy of the roles that government must play to ensure that water markets operate efficiently. It then empirically tests that taxonomy with a case study of the water market Spain established in 1999. That market’s mixed record has important implications for California and other U.S. water markets, especially during drought conditions. Spain’s system was closely modeled on California’s, in part because Spain and California share a similar geography and climate, and was also tested by a severe drought. However, as this Article shows, the volume of market transactions did not increase measurably during the drought, suggesting that the market failed in its role of mitigating inefficient water allocation. This Article argues that this failure resulted from the Spanish government not performing functions that could have facilitated market transactions — functions which California may also fail to play in the ongoing drought.
Drawing from this empirical case study of water markets in Spain, this Article argues that each of these roles is necessary for the success of water markets as a tool to mitigate the effects of drought crises. Spain introduced water market mechanisms in 1999 and explicitly stated it was imitating California’s system. However, Spanish governmental agencies erred in their design and implementation, and water markets have not become an effective tool to respond to scarcity. These lessons about the proper role of government from the Spanish case study have important implications for states in the American West facing similar water management challenges.
Keywords: water markets, scarcity, drought, water management, market failure, administrative management
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