There's not a ton of fans of the idea of tradeable water rights in my comment thread, but I'm not seeing many better options. Obviously the first-best option would be for the geological facts to just become different such that the pleasantly sunny southwest also had enough water to accommodate everyone's desires. But that's not the case. And scarce resources need to be allocated somehow. Allocating them by price has a couple of advantages. One is that it ensures that high-value uses keep going. If you have two business enterprises, and one can create VERY MUCH value out of a gallon of water and another can create JUST A BIT of value out of a gallon of water, it makes sense for the water to go to the VERY MUCH firm and for JUST A BIT enterprises to only locate themselves in areas where water is plentiful. Which is just a long way of saying that there are certain kinds of water-intensive activities that don't really belong in the arid portions of the United States, just as large solar power plants primarily do belong in those regions.
The other thing is that allocating by price lets different people make different sets of trade-offs. If water is scarce and you put a high value on having a grassy lawn but I put a low value on having one, then allocating by price will let you have a nice big lush lawn while I go without one and buy something else. Under other kind of schemes, I'll get a so-so lawn that I don't really appreciate, and you'll have a so-so lawn that leaves you wanting more.
Ultimately, we're used to the idea that a square foot of land quite properly costs dramatically more in New Jersey than in Arizona because space is more plentiful in Arizona. But why shouldn't water cost dramatically more in Arizona where water is scarce? I dunno, though. I don't have any kind of long-standing commitment to this position and am totally prepared to climb down in the face of a compelling alternative. The question, though, would have to be what policy goal is being advanced by adopting a non-market scheme -- environmental concerns, public health, what?
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