Water Markets: Priming the Invisible Pump

Rain and snow may be falling today, but throughout the world people continually fear water shortages. Is there reason for such apprehension? In Water Markets: Priming the Invisible Pump, Terry L. Anderson and Pamela Snyder argue that the answer is no -- if we return control of water from government to markets.

The authors document that humans are using only between 38 and 64 percent of the earth's readily available water. Nevertheless, in several poor countries of Africa and the Middle East, available water is often contaminated, producing millions of deaths each year. Anderson and Snyder argue that government control of water supplies has led to mismanagement and misallocation of water and that markets are the solution.

Anderson and Snyder provide a history of government water policy, including the development of laws that either prohibit the transfer of water or sharply regulate its use, such as "beneficial use" restrictions. To establish a water right in most states, an appropriator must apply the diverted water to a "beneficial" use. How "beneficial" is defined, however, is often a mystery.

For example, Montana has stated that using water in coal slurry pipelines is not beneficial. The result has been the diversion of water to areas and projects that the government, rather than the market, has deemed important.

Despite all the limits on water transfer, change is coming. Trades between agricultural users and cities are increasingly common; environmentalists are searching for ways to lease agricultural water for in-stream uses such as salmon and steelhead spawning habitat; and Indian tribes that have settled water rights disputes are leasing their water. Moreover, the market revolution has not been confined to the United States. As a response to increasing scarcity, several Australian states have begun allowing permanent transfers of water entitlements through markets.

According to the authors, reliance on markets will not only increase efficiency in allocation, it will also improve the quality of water. If property rights in water are well defined, enforced, and tradable, "individuals will have an interest in monitoring their rights and in finding ways to get additional environmental quality at minimum cost. Using incentives embedded in property rights and common law principles will take us further, more quickly, and more cost-effectively toward improving water quality than will coercion."

Concluding their discussion, Anderson and Snyder say that there is reason for optimism, but that we must not perpetuate failed policies. "Some would say that water cannot be entrusted to markets because it is a necessity of life. To the contrary, because it is a necessity of life, it is so precious that it must be trusted to the discipline of markets. Unless distortions created by governmental intervention are corrected, water shortages will become more acute and crises more will be inevitable."

Terry L. Anderson is the Martin and Illie Anderson Senior Fellow at the Hoover Institution, executive director of the Political Economy Research Center, and professor of economics at Montana State University. Pamela Snyder is a former research associate at the Political Economy Research Center.

"This book makes a dry subject fun. It belongs on the shelves of everyone interested in national resources, the environment, markets, and governance."
—Zach Willey, Environmental Defense Fund