Water Scarcity and Water Markets: A Comparison of Institutions and Practices in the Murray-Darling Basin of Australia and the Western US

Water markets in Australia’s Murray-Darling Basin (MDB) and the US west are compared in terms of their ability to allocate scarce water resources among competing uses. Both locations have been in the forefront of the development of water markets with defined water rights and conveyance structures to assist in the reallocation of water across competing demands. They also share the challenge of managing water with climate variability and climate change. As these two markets occur in developed, wealthy countries, their experiences in water markets with different water rights (appropriative, riparian and statutory rights) provide ‘best-case’ scenarios of what institutional arrangements work best, indicate which are less effective, and demonstrate what might be possible for greater use of water markets elsewhere in the world. The paper finds that the gains from trade in the MDB is worth hundreds of millions of dollars in per year, total turnover in water rights exceeds $2 billion per year and the volume of trade accounts for over 20% of surface water extractions by irrigators. In the key states of Arizona, California, Colorado, Nevada, and Texas, trades of committed water annually range between 5% and 15% of total state freshwater diversions with over $4.3 billion (2008 $) spent or committed by urban buyers between 1987 and 2008. Despite the clear benefits of water markets in both locations, there are on-going restrictions to trade that limit the potential gains and also third-party effects from use that require resolution.