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This paper compares the economic and environmental performance of a share versus a prior allocation system for managing water in Alberta's South Saskatchewan River Basin. Currently, water is allocated on a priority basis, and moving to a share system would involve significant political and legal challenges. In the absence of water trading, both initial allocation systems result in poor economic outcomes, but the prior allocation performs particularly badly. Efficiency improves with water trading as licensees respond to opportunities to reallocate water to higher value uses. However, under prior allocation, water is more concentrated with senior licensees who capture more of the gains from trade. The share system does not result in improved environmental outcomes. Water trading results in improved instream flows as water is reallocated to upstream municipal uses, which have high return flows. The analysis suggests that improving institutions for trading water will provide better economic outcomes and environmental protection than reforming the initial allocation, and that government should focus its efforts on directly reserving water for the environment.

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