Transactions Costs and Efficiency in Western Water Allocation

Economists argue that market forces should play a greater role in water allocation---emphasizing the inefficiency of allocating water to grow low value and surplus crops, while nonagricultural water users struggle to develop expensive new supplies. Agriculture accounts for 850%--95% of water use in many western states, and the cost of reducing irrigated acreage so that water can be available for other uses is generally far less than the cost of developing new water supplies (Young). Moreover, transfer of only a small portion of water used in agriculture would be sufficient to satisfy foreseeable nonagricultural water demands, so disruption of western U.S. agricultural production would be negligible (Tregarthen, Young). Over the last decade, market transfers have become a more common means to reallocate water, though nowhere could such voluntary transactions be characterized as a "free market" (Saliba and Bush). Every western state imposes conditions on water transfers. Such policies generate uncertainties and costs for transferors and have been described as inefficient and unnecessary impositions on the market (Tregarthen, Anderson and Johnson). Should public policy seek to minimize the cost of transferring water, or can transactions costs actually facilitate efficient reallocation by accounting for social costs of transfers?