[1] Market prices contain information about supply and demand, the institutions that influence both these elements, and the operation of the market. Prices also allocate scarce resources to higher-valued uses. In this paper we analyze the price history of three water markets in the arid Southwest: Arizona's Central Arizona Project, Colorado's Colorado Big Thompson Project, and New Mexico's Middle Rio Grande Conservancy District. Using water transfers over 11 years, we estimate a simultaneous system of market equations, one for price and the other for quantity demanded. Comparison of the institutional characteristics of each market reveals that Colorado's market is well developed, with many trades and rising prices that respond to market conditions, and New Mexico's market is developing well, with lower prices, but showing some response to supply and demand factors. Arizona's market is the least developed, with few trades and very low prices. Our empirical findings support our claim that markets are becoming more efficient in these regions despite the considerable institutional and historical impediments to the evolution of water markets.
Markets for Water[2] Faced with limited water supplies and ever increasing populations, all western states are looking for ways to allocate and manage their water more effectively. Although few would disagree that water is a commodity, water markets and related institutions have been slow to evolve because of a combination of inexperience and social and political resistance. There are many vested interests in the historical distribution of water rights and usage patterns of water in the western United States, and new interests are emerging all the time. Despite the most compelling arguments that water right markets will increase the efficiency with which this scarce and valuable resource is allocated, such a change necessitates a redistribution of rights and the associated wealth they represent. There is evidence, however, from the increasing number of water rights transfers that markets are emerging and will continue to develop to meet the needs of the region.[3] In principle, markets form to facilitate the efficient allocation of goods and services among producers and consumers. With relatively few, simple conditions, buyers and sellers pursuing their own self-interest will pay a single price that fully compensates sellers and provides the commodity to those who value it highest. Unfortunately, these simple conditions are rarely present in real world markets; however, markets can still achieve outcomes that are preferred and more efficient than without markets. While emerging water markets are often informal [Howe and Goemans, 2003, p.2], involve large institutional buyers such as municipalities or cities, and can be heavily institutionalized through regulation and legal machinations, the experience of markets reported in this study suggests that water rights prices are performing their dual role by providing information to buyers and sellers and encouraging the movement of w...
