The American West is gripped in a historic drought. As populations continue to grow, so too does the need to remove water from streams, rivers, and other waterways to meet urban and agricultural demands. Traditionally, the response to drought has been to divert more water, build dams, or pump groundwater. With many of these options no longer politically or economically feasible, a more innovative approach is needed. 

One solution: water markets. Markets are a proven way to effectively allocate scarce resources among competing users through voluntary negotiation instead of legal or political conflict. Where water markets are allowed to function, prices provide incentives to conserve, and markets enable water to be moved from lower-valued to higher-valued uses.

Water markets have expanded significantly over the past two decades. Yet in many states, cumbersome regulations as well as other legal and political barriers hinder more widespread use of water markets. Expanding the use of water markets can allow competing users to cooperate rather than fight, encourage conservation, and help alleviate the economic and environmental effects of water scarcity now and in the future.