Rescuing Water Markets

I posted a comment to a recent post on water rights and how those rights should be determined. I stated quite simply that those rights should be determined by the market and that whoever values it more will own the rights and can trade or sell them as they please. I began looking for sources on the topic and came across an article at www.perc.org that reveales that its not always that simple. The article is entitlled "Rescuing Water Markets" and discusses the effects of the water market that existed between the city of Los Angeles and rural Owen Valley in the early part of the 20th century. Because of the rapid growth of L.A. more water was needed as the surrounding area lacked a large enough watershed to provide for the growing community. The answer to the problem was Owen Valley which is located in Southeastern California near Nevada. It was an agricultural community that had an abundance of water. The city of L.A. began to buy property with the included water rights and began to send the water to L.A. Initially both sides were becoming better off. L.A. was receiving their water and the farmers were making more money selling their water than they were selling their crops.
Eventually problems arose. These problems came from three main sources: Disputes over valuation of the water, bilateral monopolies as only two parties were involved in the water trade, and third party effects on the Own Valley community. The article is a little long but interesting. It shows that in real world situations markets, although usually are the best solution, do have their problems as well.