Reviewing the arguments for market based approaches to water distribution: a critical assessment for sustainable water management in Spain

Countries in dry climates need to fi nd more effi cient water management practices to meet growing water demand. Traditional command-and-control water policies are associated with ineffi ciencies and have motivated the exploration of market based approaches, includ- ing water trading. Water trading has its intellectual origin with the theory of Pareto optimal- ity and the Coase theorem, which asserts that resources will be allocated effi ciently given well defi ned property rights and no transaction costs. This research reviews the case for water trading and fi nds that, in the Spanish context, institutional innovations and reforms are needed to address externalities in the water market and lower transaction costs before water trading can become viable. Policies based purely on market incentives are unlikely to produce desirable results. The challenge for Spanish policy-makers will be to create the appropriate mix of market incentives and institutional conditions that will promote an effi cient distribution of water resources. Copyright © 2009 John Wiley & Sons, Ltd and ERP Environment.