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Water Market. Markets and prices play a role in allo- cation of resour.ces among competing uses, and they provide incentives to conserve and invest in new sup- plies. In a competitive economy, price adjustments and market transfers keep supply and demand in balance. Prices rise when de- mand increases faster than supply. Higher prices provide incentives to use less, to produce more, and to develop and adopt technologies that conserve use and increase output. Markets enable resources to move from lower to higher-value uses as conditions change. For example, wa- ter traditionally used for irrigation may be more valuable as a munici- pal water source as the demands of a nearby urban center increase. Tradable water rights potentially can encourage conservation and a more economically efficient alloca- tion of scarce water resources. Cur- rently, water is underpriced and of- ten allocated based on institutions established when water was not con- sidered to be a scarce resource. Us- ers pay nothing for the water itself. Municipal and industrial users typi- cally pay a fee reflecting the costs of storing, delivering, and treating water supplies. But even these costs are likely to be subsidized for irri- gation, which commonly represents a region's largest water use. With- out an opportunity to sell unused supplies, irrigators have little incen- tive to conserve water. With the in- troduction of tradable water rights, however, users value water in terms of its opportunity cost-the value they could get by selling water- rather than at the subsidized price they pay for it. In spite of their potential ben- efits and growing popularity, mar- ket forces have been slow to adapt to the reality of water scarcity. Ef- ficient markets require well- defined, transferable property rights, and the full costs and ben- efits of a transfer must be borne by the buyers and sellers. Both the nature of the resource and the in- stitutions that manage and allo- cate water can make it difficult to meet these conditions. ownership of land. They continue to provide the basis of water law in many areas, including some arid Moslem and humid European countries and the eastern United States. These rights are poorly de- fined because shortages are shared by all riparian owners and use is subject to regulatory or judicial interpretation as to what is reason- able or might unduly inconve- Market forces have been slow to adapt to the reality of water scarcity. Ob.tacle. The variability of water supplies in time and space creates problems for establishing clear property rights. Driven by energy from the sun, water constantly evaporates from seas, lakes, and streams or transpires from plants, entering the atmosphere, then re- turning to earth through precipi- tation. Precipitation that is not quickly evaporated or transpired back to the atmosphere is the source of a region's renewable wa- ter supplies. This water flows into lakes, rivers, groundwater reser- voirs, and eventually the ocean, unless it is first withdrawn for use. Three basic systems-riparian rights, prior appropriation rights, and public permits-have devel- oped for establishing rights to this water. Riparian rights. The common law system of riparian rights gives own- ers of the lands bordering a water body use of the water in ways that do not unduly inconvenience other riparian owners. Riparian rights have origins in the earliest legal systems establishing private nience others. Moreover, riparian rights are not directly marketable because they are attached to the land and use is restricted to those lands. Appropriative rights. Constraints on transferring water to non- riparian lands and uncertainties such as how much water a ripar- ian owner can use are obstacles to applying riparian rights in areas where streams are fewer and flows are smaller and less reliable. Con- sequently, in the arid and semi- arid western United States, ripar- ian rights were abandoned in favor of water rights based on prior ap- propriation. Prior appropriation rights, which have been adapted by all 17 western states, have three principal features: . Water rights are established by withdrawing water from its natu- ral source and putting it to a ben- eficial use, such as irrigation. Un- like the owner of riparian rights, the party appropriating water does not have to be a riparian land- owner, and the water does not have to be used on riparian lands. . During periods of shortage, wa- ter is allocated according to the Spring 2001 . 55