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command and control approaches (Western Gover- nors' Association, 1993). Two reports were issued by the Freshwater Foundation concerning water trans- fers. The first in 1985 was entitled Water Manage- ment in Transition, followed in 1986 by Water Values and Markets: Emerging Management Tools including an article titled "Water Marketing: An Idea Whose Time Has Come" (Anderson, 1986), Conferences devoted solely to water markets have been held in Denver, Colorado, Sacramento, Califor- nia and Lincoln, Nebraska. The title of a 1986 Denver Conference, "Water Marketing: Opportunities and Challenges of a New Era," is an early reflection of the optimism for water markets and a recognition that problems exist in implementation, Many books and papers have been written on the virtues and Vices associated with water transfers and markets (National Research Council, 1992; Howe et ai" 1986; Checchio, 1988; Gottlieb and Wiley, 1987; Weatherford and Shupe, 1986; Young, 1986; Wahl, 1989). Other publications have sought to provide mar- ket information, at a price, for those interested in ongoing transactions, The mIter Strategist (Stratecon, Inc., 1990) is a newsletter that reports on water right transactions where infonnation on transfers has been made available by private or public sources, The Water Exchange Information Service, another sub- scription service created to advertise and sell water rights, was established in Denver in the fall of 1986, then discontinued about a year later. There are bro- kers who specialize in water:ight transactions (e,g, 4 arrison Resources, Inc., Fan :Cullins, Colorado) and "estment companies have be"" formed which make opeculative investments in water rights. For example, Western Water Rights, Inc. amasoed $35 million to develop a portfolio of water rights along the Colorado Front Range (Water Market Update, 1987) and anoth- er investment company is now being developed, Even the popular media have taken notice of water marketing (Time, 1991; NIl/fnnal Geographic. 1993; Sunset, 1987; The Washi".,'lun Times, 1987; The Den- ver Post, 1987; NOVA, 1987). Another example of the widespread interest in water markets is that seem- ingly divergent groups such as the U,S, Department of Interior (Wahl and Osterhoudt, 1986), Western Governors' Association (Park City, 1993; Driver, 1986), The Nature Conservancy (Chisholm, 1994) and Sierra Club (Udall, 1987) are advocating water mar- keting as an efficient method to allocate water and reduce economic and environmental costs, From the Governors' Association point of view, water marketing translates into lower public costs for additional water supplies, From the Sierra Club's point of view, water marketing can mean more efficient allocation, poten- tially fewer dams and less environmental impact. WATER RESOURCES BULLETIN '. Michelsen TRANSFERS ARE NOT NEW Water right transfers are not new. Individual water transfers have been occurring in many areas since the time water rights were established by prior appropri- ation laws one hundred years ago, The incentive for water transfers or reallocation is based on the percep- tion that economic gains may be captured by transfer- ring water from lower-valued to higher valued uses (Saliba and Bush, 1987). As demand increases and the cost to obtain additional water rises beyond lower value current uses, economic pressure is applied to reallocate water to higher value uses, Typically, the market mechanism reallocates resources, in this case water rights, from lower-valued to higher-valued uses. Agriculture was one of the earliest users of water in the West and, in accordance with the prior appro- priation doctrine of first in time - first in right, farm- ers hold a large share and some of the most senior or reliable water rights, Despite the rapid urbanization of the West, most of the water is still being used by the agricultural sector, Howe et al. (1990) state that, according to the U,S, Geological Survey data, "80 per- cent of all water diversions and nearly 90 percent of all water consumption in the western United States occur in irrigated agriculture." However, the value of water used in agriculture is often lower than the value of water in other uses (Young and Gray, 1972; Gibbons, 1986), Therefore, it should not be surprising that irrigated agriculture is the source of water for many water right transfers. More than just a few individual water right trans- fers are necessary to constitute a market. The term water market generally refers to a group of indepen- dent voluntary decisions (transactions) by consumers and producers taking place continuously over a period of time (Katz and Rosen, 1994), A transaction con- cerns transferring the right to use water, either on a short term or long-term basis, and does not necessarily invoh'e ch'l1lging the purpose or place of use (MacDonnell, 1990). If the number of transactions are few and there is a wide vliriation in water right price, the market, if any, is considered thin or not well established (Saliba and Bush, 1987). MacDonnell (1990) collected information on water right transfer applications (permanent and temporary transfers) filed in six southwestern states during the period from 1975 through 1984, During this period, the annual average number of transfer applications was highest in Utah (385), New Mexico (113), and Colorado (86), and lowest in Wyoming (4), Arizona (3) and California (3), However, the quantity of wate~ sought to be transferred was inverse to the number.o applications filed in each state. The median quantity 972