Why water markets are hard – what economists call “transaction costs”

Nathanael Johnson at Grist continues his excellent work digging past the noise to try to help us understand what’s really going on with California’s drought. Today it’s a deep dive into water markets, which includes this great explanation of why they’re so hard in practice:

It’s tricky to show that the water you’re selling is legally yours, and tricky to get it to your buyer. These problems stem from the physical properties of the stuff. The amount of water you need to irrigate a field is big and heavy; it’s slippery — to hold it we need special containers (like reservoirs); it’s always moving, and mixing, and splitting into pieces, so it’s hard to tell whose is whose; it unpredictably falls out of the sky, and has no respect for property lines; if you drop it, it disappears into the ground. Because water is liquid in the physical sense, it is not at all liquid in the financial sense.

Johnson takes us through a hypothetical water deal to illustrate what economists call “transaction costs”. Well worth a click.


  1. David, what will next week’s short-term solution be?

    I won’t deny that technology has pretty much saved us up until this point, and will continue to do so, but technology does nothing to solve the social reasons for water overuse, environmental injustice, and all of the other fuzzy stuff that’s causing most of the water problems that we have. I guess that communications technology that allows us to share knowledge and make better decisions (the decisions themselves have nothing to do with technology) is pretty great, but old-fashioned mechanisms are already out there and they work.

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