Formal Water Markets: Why, When, and How to Introduce Tradable Water Rights." World Bank Res Obs 12(2

In most countries the state owns the water resources and the hydraulic infrastruc-ture, and public officials decide who gets the water, how it is to be used, and how much will be charged for it. But costly inefficiencies in the supply and use of water support a shift from government provision to a market-based approach that is more effective and less wasteful Markets can allow rapid changes in allocation in response to changing demands for water and can stimulate investment and employment as investors are assured of access to secure supplies of water. Because of water's unique characteristics, such markets do not work everywhere; nor do they resolve all water-related issues. By designing appropriate water laws and regulations and by strengthening private and public institutions to administer them, formal water markets can effectively address rising demands for groundwater and for water found in rivers, lakes, and canals. Lessons from Chiles experience demonstrate that formal water markets can improve the economic efficiency of water use and stimulate investment. In many developing countries, governments consider water to be too precious a resource or too difficult a commodity to be left to the market. Decisions about who gets water, at what price, and for what use have thus been entrusted to public officials. Although the state retains ownership of diis asset, it typically endows private and public entities, such as farmers, industrial users, and power and water companies, with the right to use surface water.or groundwater for a particular purpose. These rights are defined in a variety of ways and have been written into law or have evolved dirough custom (Sampath 1992). The alloca-tion of water rights is typically the responsibility of die government, as is the construction, ownership, and operation of die infrastructure such as dams, res-ervoirs, and canals. In some countries diat government even installs and oper