Increasing demand for water amid variable hydrology and climate uncertainty challenges the traditional methods of allocating scarce water resources. Water markets are an oft-promoted allocation method but their adoption is limited. This paper evaluates the performance of policy alternatives to water markets in terms of economic efficiency using analytical models of allocation. Priority systems, pricing systems and negotiation are compared for varying levels of scarcity. The analysis finds that the performance of each system depends on the level of scarcity. In general, a priority-based system is best in the worst conditions, while negotiation is better otherwise. This finding is pertinent to water policy and drought management, as negotiation is often only used in the worst conditions and priority used at other times. These results imply the reverse should be true. The paper also shows the means for evaluating non-market allocation in economic terms.

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