I said some stuff about water markets in this Q&A with Drew Beckwith of Western Resources Advocates:
Beckwith: That’s certainly an NGO concern, that an unbridled market does not take into account the environment and that water would just run uphill towards money.
Fleck: This is a problem with thinking about markets, right? A market is built by humans to meet a need. So you can build a market that would include environmental values for water and have an institutional framework that pays farmers to leave water in-river for an environmental purpose. It’s just an implementation detail of building a market, it’s not intrinsic to markets. This is a question of where you draw the boundaries in and around the market and what do you include. Markets are built by people to accomplish particular goals. They’re not some magic thing off on the side. This is one of the failures of our public understanding of economics that’s gotten us in all kinds of trouble. People build markets.
But there are no effective water markets in, say, California where only 1% of all water used comes from the spot market (short term transfers) that could offset drought impacts in a critical dry year.
Markets for commodities are typically structured around competition for the lowest price. Any market for wholesale water would have to be structured around water at the highest price, resulting in those like LADWP outbidding all comers and thus pricing out small communities and farmers. Thus wholesale water markets would be like real estate markets where if one house sells for a highest price in a neighborhood that establishes the new market price for all the other (often times) inferior properties.
Markets are willing buyers and sellers without a third party bystander interfering. CEQA allows third party “stakeholders” with no skin in the game to be able to exact water diversions (Indian tribes, environmentalists) without having to pay for it (free riders). That subverts markets.
Contrary to recently released academic books on California’s water market failure contributing to the recent drought, there is no water market in California (and elsewhere) so how could there be “market failure”?