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As I understand it, the history of water rights in CA, and indeed in the US west generally, is a history of lack of markets; it's all been political maneuvering by various factions to make sure they aren't the ones who go short when the water gets divided up. There has never been an actual market to allocate the limited supply of water to the highest value uses. If there were, agriculture in much of CA wouldn't exist, since much of CA is a desert and it makes no sense to do agriculture in a desert when you can ship in food from elsewhere at lower cost.

How do you determine who owns water in the first place.

A real & important question, but by no means an impossible problem. E.g. suppose "the public" (e.g. gov't, as with public lands) owns all of it in the first place, sells it, and uses the proceeds to fund water projects.

A less radical option would be to keep the system of water rights we have today and simply allow the water to be bought and sold. Currently if you sell it, someone can take you to court & say "well you didn't use it, so you should lose your water rights" (because California follows the doctrine of first use). Would run the risk of creating wealthy water czars overnight, but less radical.

Who sets the price and what stops the very wealthy from buying it all and selling it for a giant profit. The further we go down this train of thought the less market-like it becomes very quickly.

It's a market. The first owner sets the price at whatever point they like, balancing their interests of revenue, protecting the resource, and so forth. If people are arbitraging & selling the water for increased prices, the first owner increases their price and eliminates the arbitrage opportunity.

How do you get a first owner for water?

Are you being intentionally obtuse? I just described two ways. There's Right of first use, Riparian rights, and my pet illustrative example of treating it as a publicly held asset to be sold... There's other ways beyond those three, but the first two are how ownership is assigned in the US today.

riparian rights is what led to the CA water wars where the wealthy from LA bought land up stream of the farmers in the owen's valley. It didn't solve the problem we're talking about regarding rich people buying up the water.

I have no idea how first use could work for water, would be happy to read more if you link me to something about it. A quick googling returned nothing.

The last one requires a lot more specifics to talk about meaningfully, but I'll bet that most of the free marketers wouldn't consider it a free market.

You're arguing with extreme left about markets.

In a world in which transaction costs are sufficiently low, Coase's Theorem says it doesn't matter: you make the best initial choice you can, and then people execute free market trades to get to the overall most efficient allocation.

So one way of looking at the whole problem is to ask why transaction costs are too high to make this feasible. And the obvious answer is politics.

efficiency and humanity are sometimes at odds. Slavery was very efficient.

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