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Stock Markets. Bond Markets. Water Markets?

There are so many things Americans take for granted–until we don’t have them. Just ask Californians and others in the West who are suffering through a record-breaking drought.

Put aside the question of whether man-made climate change has caused the problem. What matters now is: What is the solution?

The first reaction to shortages is to ration. Tell people they can’t water their lawns, then limit the amount of water they can use in their homes, and so forth. The result? No one is happy

 Rationing is how the U.S. responded to oil shortages in the 1970s, and it led to long lines. No one was happy then either.

Ask an economist what to do any about shortage and it won’t be more than a nanosecond before he or she says: Let the market sort it out, without government intervention to aid specific interests, such as farmers, by setting artificially low prices (as has long been true in California).

To be sure, setting up water markets involves a lot of detailed work, most notably the construction of platforms for trading. A recent Brookings report goes through the issues and offers some sensible guidelines for allowing markets to eliminate shortages through the price mechanism, which is what we have done for oil since the 1980s.

The issues of equity and fairness under a market system must be resolved. We don’t want a society in which the rich can buy up all the water and leave the rest of us thirsty.

This problem can be largely addressed, however, by limiting the trading to municipalities or water districts, rather than individuals. In this way, high prices in a region can be spread across many people (although at the municipality level, some lesser degree of rationing may still be needed to ensure that any ceiling amounts paid for are not exceeded).


One way or another, the time has come for more market-driven solutions to water shortages.

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