Reviewing the arguments for market based approaches to water distribution: a critical assessment for sustainable water management in Spain

Countries in dry climates need to find more efficient water management practices to meet growing water demand. Traditional command-and-control water policies are associated with inefficiencies and have motivated the exploration of market based approaches, including water trading. Water trading has its intellectual origin with the theory of Pareto optimality and the Coase theorem, which asserts that resources will be allocated efficiently given well defined property rights and no transaction costs. This research reviews the case for water trading and finds that, in the Spanish context, institutional innovations and reforms are needed to address externalities in the water market and lower transaction costs before water trading can become viable. Policies based purely on market incentives are unlikely to produce desirable results. The challenge for Spanish policy-makers will be to create the appropriate mix of market incentives and institutional conditions that will promote an efficient distribution of water resources. Copyright © 2009 John Wiley & Sons, Ltd and ERP Environment.