Adaptation, Climate Change, Agriculture, and Water

Critics of water markets and efficient allocations in general claim that this flexibility is dangerous because high-income households and profitable firms could enjoy all the water they want, leaving low-income households to die of thirst. Would this happen if water was allocated by a market?  Drinking is one of the highest valued uses of water in the entire market. A market for water is going to place a very high priority on getting people drinking water precisely because it is a high-valued use. In the absence of markets for water in many developing countries, poor people currently pay the highest price for water in the country (WUP, 2003). Rich households and firms enjoy low cost water from their utility connections, but poor households must pay much higher prices for water from tankers.  Markets for water would even out these price differences and likely reduce the price of drinking water for the poor. Higher prices may be a burden for the poor and they may cause the poor to use less water.  But it is not inevitable that markets would prevent people from having access to drinking water.      A more serious concern with reallocating water is that there are often incidental beneficiaries of water withdrawals.  When a farmer exercises his right to withdraw water, a great deal of that water flows off the farmer’s land into neighbors lands either over the surface or in shallow aquifers. The neighbors get access to water from the primary farmer’s withdrawal. If the primary farmer sells the right to withdraw his water to a distant user, the neighbors will no longer get this incidental benefit. The neighbors therefore have a stake in preventing the primary farmer from selling. The water market would benefit from effective ways to grant part of the proceeds from a water sale to the neighboring users of existing withdrawals.