This is just the same idea of charging for any externality
You figure out how much water the city can afford to use in a given day. Everyone gets an even share of the water. You can use what you want and sell the rest. The price will rise and fall based on the demand. A poor person can choose not to water their lawn and get paid by a golf course that wants to waste lots of water.
I think it would have to work by selling your surplus from the day before at a clearing price based on how the day worked out. You wouldn't know the exact price ahead of time, but you would have a pretty could idea based on the day before.
I am just not sure if the water meters can be read remotely in real-time or if they have to be physically read, which would make this more complicated but still possible.
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Fine in principal, but...
What externality are you refering to? Who decides "how much water the city can afford" and how?How would this be implemented? Do you think people would want to spend their time "trading" their water?
I think just charging, with a meter, for the water you use makes more sense.
The town manager would decide how much water you could use based on the same principles they already use when declaring water restrictions. You don't have to sit around and trade water. It all happens automatically. Basically people who want to conserve automatically get paid by people who want to play gold in the desert.
Yes, and include commercial farming. Depending on the area, farmers are using 80%+ of the water subsidized by the taxpayer, and you're discussing parcelling out the remaining 20%. I think your idea is healthy if it is extended to the whole "externality"... and in this regard, the farmers would then have to pay residents for water rights.
However the problem is more than that, as exemplified by the los angeles problem... where water is drained from the owens valley turning it in to a desert, and taken from teh colorado river. The jurisdiction of governance for water matters as suggested in your paradigm should be every person in a drainage basin, and in this regard, the state borders create an impedence to effective water management and sharing... not event to mention mexico's legitimate claim to water from the colorado river that america thumbs its nose at.
In keeping with your idea, the entire water per day market should be structured like a futures exchange, and the average household should have to buy/sell on open exchange water depending on demand... and prices might skyrocket with speculators arbitraging during periods of duress, just at least the price of the commodity will actually reflect its demand and its scarcity, which the current "free market" ???? is not doing, because they are not using a free market at all, rather graft and institutional corruption.
I agree with adam: charging everyone for water with a meter is the best. Market forces can also be used to control water use in times of lower availability. I believe it is Australia that instituted a simple system along these lines: the water meter in your house has three lights - green, yellow, and red. These colors correspond to low, medium and high prices for water which are updated electronically based on availability. This system is also/can also be used to encourage conservation of other resources (electricity, gas etc.) without copious regulation.
This proposal is basically a complicated version of social ownership of natural resources paired with a Citizen's Dividend. This idea is the basis of Alaska's Trust Fund and has been promoted by Henry George and his intellecutal descendents. YOu may appreciate this article at Wikipedia: http://en.wikipedia.org/wiki/Georgism
I guess the complication comes from the fact that the availablity of water can change rather drastically, requiring changes in the price.
Having a market in natural resources is a nice idea, but it is rather frivolous (in the USA) when Congress already distorts every market in the country with taxes and subsidies... and the politicians aren't accountable to the public on these issues because the public is more concerned with things like abortion and war, and we only get two politicians to choose from.