Efforts to address water scarcity have traditionally relied on changing the spatial and temporal availability of water through water importation, storage, and conveyance. More recently, water managers have invested heavily in improving water use efficiency and conservation. Yet as new supply options become harder to find and/or appropriate, and demand hardens, society must consider other options to, if not reduce scarcity, minimize the impacts of such scarcity. This paper explores the role water markets are playing in addressing water scarcity in the American southwest: a water-limited arid and semi-arid region characterized by significant population growth rates relative to the rest of the US. Focusing on three representative southwestern states—Arizona, California, and Texas—we begin by highlighting how trends in water supply allocations from different water sources (e.g., surface water, groundwater, and wastewater) and water demand by different water users (e.g., agricultural, municipal, and environmental) have changed over time within each state. We then present recent data that shows how water trading has changed over time—in terms of value and volume—both at state level and sector level aggregates. We end with a discussion regarding some institutional adjustments that are necessary for water markets to achieve their potential in helping society address water scarcity.
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