Water markets an alternative for central water allocation?

South Africa is entering a whole new era in water management. In the face of efforts tocurtail runaway government spending and protect the environment, water institutions mustfoster the conservation and efficient allocation of existing supplies. They must also takewater's growing recreational and environmental value into account. The crucial question is,can the current water institutions meet today's requirements? Despite the resultinginefficiency and waste, traditional resource economists continue to identify taxes,regulations, subsidies, and governmental allocation as solutions to today's water problems.Internationally, there is enough evidence to prove that central allocation with almost anyresource gave rise to gross inefficiency. The main reason is the distortions on the value placedon resources within such a centralised planning environment. Resources are either valued tohigh or to low. What is the value of freshwater and how can water be allocated in such a wayas to reflect the scarcity value of water? A non-linear spatial equilibrium model wasdeveloped to simulate the impact of a potential water market in the Upper-Berg River:Western Cape. This paper explores water markets as an alternative to central water allocationdecisions