Some water markets maintain institutional elements that provide allocative
advantages to specified water users. In the Lower Rio Grande Valley, water
rights are designated as either municipal or agricultural (irrigation), wit
h certain prioritization advantages afforded to municipal accounts. While s
ales of rights between municipalities and irrigators are allowed, the prior
ity disparity results in a prohibition on leasing between sectors. Concern
over meeting future urban demand has led municipalities to purchase rights
well in excess of current needs. The inability to lease municipal water to
irrigators removes a significant and growing fraction of available water fr
om the market. The additional flexibility provided by leasing provides a va
luable tool for managing seasonal drought. In this analysis the justificati
on for prioritized municipal water is investigated. Results indicate that t
he added security municipalities may derive from higher prioritization duri
ng drought is accompanied by economic inefficiencies in regional water allo
cation. It is argued that eliminating municipal protection and the conseque
nt allowance of intersectoral leasing would contribute to regional well-bei
ng at small cost to municipal water users.