The encyclopedia · Strategy & Leadership · Strategic decision · 1991–1994
California turned drought water into a market
During the 1987–92 drought, California's state-run water bank bought water from willing sellers and sold it where it was needed most.
California Department of Water Resources
the move
California's 1987–92 drought hit regions unevenly: some farms and cities ran out of water while others, with senior rights or storage, still had plenty. There was no organized way to move water between them.
In 1991 the Department of Water Resources created an Emergency Drought Water Bank. It bought water from willing sellers — paying farmers to fallow land, buying groundwater and reservoir releases — and resold it to dry areas.
The 1991 bank purchased about 732,000 acre-feet and asked $175 per acre-foot for what it sold. Acting as a single intermediary cut transaction costs and gave buyers one reliable price instead of many thin bilateral deals.
The bank operated again in 1992 and 1994, and the trades built a lasting water market: PPIC reports roughly 1.5 million acre-feet now trades every year — about 4% of what cities and farms use — with the drought-era bank credited as the catalyst.
why it works
- One intermediary makes a thin market thick: buyers and sellers need only find the bank, not each other.
- Voluntary trades move water to its highest-value use without seizing anyone's rights.
- A clear price lets farmers decide for themselves whether selling water beats growing crops.
what transfers
When a market is missing, the state may have to build it: one intermediary moved water to its highest-value uses fast, and those trades seeded California's permanent water market.
what came after
California's water market has grown steadily since, with about 1.5 million acre-feet trading annually; later droughts reused the bank model, and the state's experience became the reference case for water marketing worldwide.
references
- California's Water Market (fact sheet, August 2021)
- California's Evolving Water Markets: A Case Study from 1977 to 2000
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