[16] Studies have shown that only modest transfers of water (10%) from agriculture to urban areas would be needed to bring allocation of developed uses into economic balance.
[16] However, it is frequently not practicable to compensate losers from water transfers because of the difficulty of identifying them, or they may be located in different legal jurisdictions.
[16] The aforementioned benefits of water trading are improved as the following conditions are met: Several types of stakeholders are recognized as potential participants in a water market, including agricultural users, industrial, and urban, as well as those who value in stream uses for recreation, habitat preservation, or other environmental benefits.
In the event of water ranching, the groundwater removed from the property is often much greater than that which would be used for average agricultural use,[23] which can be harmful to the ecosystems which rely on it.
[25] Due to higher capital costs, decreasing sites for dam construction, and increasing awareness of environmental damage from dam construction (consider impaired Northwest salmon runs, for one example), water markets may be preferable to supply-side solutions that are not viable or sustainable in the long-run.
[14][31][32] A CPR is "a natural or man-made resource system sufficiently large as to make it costly (but not impossible) to exclude beneficiaries from obtaining benefits from its use"([33]).
Irrigation water will also percolate and recycle back to the stream so non-water rights holding beneficiaries downstream will benefit from return flows.
[34] To redress this, one traditional scheme for common pool resource management is a "Leviathan" strategy, in which a central authority (like government) must enforce rules, and coerce and punish appropriators as necessary to obey resource rules; however a large enforcer cannot catch all offenders or obtain complete information so the Leviathan strategy is not a perfect solution.
[31] However, privatization is not a perfect solution because it erroneously assumes when the resource pool is divided, all resultant units have equal value.
[31] As an alternative, Elinor Ostrom posits common pool resources are embedded in complex, social-ecological systems[35] and can be managed by nested or polycentric public enterprises, where institutions at different scales (e.g. national to local hydrologic basin) horizontally and vertically collaborate to sustainably manage a common pool resource.
Nonetheless, the instinct for central planning lives on and some policy makers are tempted to favour those crops deemed to produce high gross values per megalitre when economics teaches that it is marginal valuations that are important.
Nevertheless, in popular discussion, there is considerable emphasis on the crops being grown when what matters most for public policy is the amount of water taken from rivers and any externalities associated with irrigation.
Trading for these rights occur across Australian states, with caps being set for each area to assure that water is not being over-extracted from the Basin to another region.
This resulted in the monopolization of water rights on one hand, and on the trading of nominal entitlements on the other, with negative impacts on sustainability and third parties.
This legal change meant that existing users, which included peasant farmers and small-scale water supply networks, were immediately illegalized, resulting in widespread angry protests.
Specific concerns that have arisen include the hoarding of water rights without using them for speculative purposes and the lack of state regulation to ensure that the market works properly and fairly.
[50] Rights holders must apply appropriated water to beneficial use (recognized as domestic, municipal, irrigation, stockwatering, power, mining, recreation, wildlife and fish, or groundwater recharge)[51] or risk forfeiture of rights (which occurs if water is not applied to beneficial use for 5 or more consecutive years).
The 1980 Arizona Groundwater Code created jurisdictions called "Active Management Areas" (AMA) in parts of the state with high water demand, such as Phoenix, Tucson, and Prescott.
Because of these provisions, and the characteristic of water as a common pool resource, California law requires state agencies to review and approve independent market transfers on behalf of the public.
[37] The CBT Dam is a Bureau of Reclamation irrigation project where a water market has developed, and is based on a proportional rights system.
[37] The NCWCD puts parties in contact to facilitate trade and reviews applications which must be submitted to the district to make sure water will be for beneficial use as well as to guard against speculative purchases.
[1] The transfer process takes 4 to 6 weeks, is relatively simple and straightforward, and does not require the approval of a state engineer, significantly reducing the time and costs involved.
[1] Transaction costs are lower in the CBT which has only the NCWCD as its governance structure to contract with the Bureau of Reclamation for both agricultural and urban users.
[1] The system is well regarded as a model for other markets and credited with having allowed northern Colorado to adjust to short and long term shifts in water demand and supply.
The role of this position is to not only facilitate the exchanges of water rights that occur, but also monitor the aquifer levels as resources are consumed.
[58] New Mexico must be responsible for the management of its own resource supply, as the inability to do so will require the surrender of authority to the federal level of administration.
[58] To aid in the fulfillment of these and additional requirements of the State Water Engineer, New Mexico has recently implemented an "active resource management" plan.
Once allocated to a party, failure to put to beneficial use for period of time (commonly 4 years) may lead to rights being reclaimed by the State.
This tax would be embedded in the cost associated with purchasing a short term water transfer and the generated revenue would then accumulate in a designated fund.
At the end of the trading year, erred parties would then be permitted to file for compensation based on the nature and severity of the damages.