Water rights are essentially the right to take the water from a particular location and put that water to use. Water Rights within the United States are managed by State and regional laws. Some economists argue that water trading can promote more efficient water allocation because a market based price acts as an incentive for users to allocate resources from low value activities to high value activities. There are debates about the extent to which water markets operate efficiently in practice, what the social and environmental outcomes of water trading schemes are, and the ethics of applying economic principles to a resource such as water. There are also several conditions that should be met in order to have a viable water trading market,
- Voluntary buyers and sellers: Parties interested in buying must have access to water rights and those interested in selling their entitlements must be allowed to do so.
- Allocation of vested rights: In order to achieve efficiency in the distribution and use of water rights, available sources must be allotted to specific parties. While owners do not own the water itself, they do own the right to use the water. These property rights are established by a governing body and in many cases are available for sale or for lease.
- Information: In order to function efficiently in a market, participants must know their own estimated costs. One who owns the water rights of a specific area must know the quantity of water needed, the value of that water, and the point at which additional consumption of water is no longer beneficial (ex. Land has been fully irrigated and additional water would be detrimental).
- Clear definition of rights: This refers to measurement of bodies of water accessible by the rights’ holders. Bodies of water must be consistently identified, including the source of water body as well as measurement (acre/ft) of “right to use.” Lack of clarity on permits or water rights allocation may lead to lost, null, or void transactions.
- Transferable from land rights: In reference to water ranching, water trading will be most efficient when access to water is independent of the land. Buying and selling of rights becomes less complicated when one is not considering the sale or lease of water and land.
- Changeable types of water use: As agricultural users of water rights are electing to sell or lease these allotments, the destination of the water will vary. It is necessary that transferred rights may be redeemed for whatever agricultural, municipal, industrial, or residential purpose it is assigned.
Water Rights in the United States is regulated on a state by state basis. The water trading practice is much more involved in the western United States, because of the climate and general lack of water in these states.