Economics of Water

I come to this question late; my apologies.

I dimly sense that the development of the market for bottled drinking water at roughly a dollar per pint (delivered via truck, in plastic bottles, to end consumer point of use) suggests that the municiple utilities' market for comparably drinkABLE water (delivered by pipe) has severely underpriced its product. Alternately, the municiple water services which are providing lawn-water, dish-water, bath-water, and clothes-washing-water at the CORRECT price are spending too much on bringing that product up to an excessively high quality standard -- drinkable.

I think we are seeing a market reconciliation of this via home water-treatment (filtration, ionization, "softening", etc.) which takes as a premise that the city water is of adequate quality for all-but-drinking.

I don't see why the manufacture -- potable water is a man-made product, after all -- and distribution couldn't be handled as a private matter. Working within the existing framework -- including treaties with Mexico regarding withdrawals -- private companies could purify and distribute the water up to the municipal level where distribution would likely remain a natural monopoly.

How does the government allocate the water at the source? By auction, I suppose. There would be some difficulties as to how to define the rights to withdraw certain amounts of water. For instance, the property right might take into account river levels that are abnormally low and any amount withdrawn would have to occur with downstream effects in mind.

I wonder if a developed market couldn't be used as a device against flooding. You obviously have an incentive to accumulate as much as possible given the surplus.

Short answer: yes, it could be done.