A Market for Water Transfers in the Upper Colorado River Basin and the Role of Transaction Costs

Allocation of water in the Upper Colorado River Basin is currently determined by the system of prior appropriation; a legal structure that has led to an inefficient allocation of water in the basin. A market for tradable water rights is proposed that would allow for a more optimal allocation to be achieved. An analytical framework for the analysis of water allocation systems is presented and its application to a hypothetical Upper Basin market is discussed. A quantitative model is designed that simulates a market for tradable water rights permits in the Upper Basin, with an emphasis on transaction costs. The simulated market is found to provide a more socially and economically efficient allocation of water for the Upper Basin than currently exists