Because of its importance and the perceived inability of private sector sources to meet water demands, many countries have depended on the public sector to provide water services for their populations. Yet this has resulted in many inefficient public water projects and in inadequate supplies of good quality and reliable water. Decentralization of water management, including the use of water markets, cannot solve all of the water problems, but it can improve the efficiency of water allocation. When given adequate responsibility and authority, water user associations have effectively taken over water management activities at a savings to tax payers. Moreover, water markets add the potential benefit of improving water efficiency within the sector as well as providing a mechanism for reallocating water among sectors. The key question involves developing innovative mechanisms for reducing the transaction costs of organizing water users and of making water trades. Water rights need to be established which are recorded, tradeable, enforceable, and separate from land if markets are to operate effectively. Also, institutions are needed that effectively resolve conflicts over water rights, including third party impacts and water quality concerns.