> So we trade in political volatility for political volatility plus market volatility (positive, though perhaps small)? That doesn't sound like a good deal to me...
I invite you to name a successful country with a high standard of living which has only political volatility, according to your model.
> In addition, how on earth are you going to make water fully private?
Not what I was proposing. And you are correct that private property does not make a good fit "non-excludable" goods. However, some water is excludable (river flows, lakes, tanks, pipes) and some isn't (rain).
Where a thing can be traded, there are well recognised advantages to allowing that trade. Arbitrage can smooth prices across multiple markets, some derivatives can smooth prices across time. The use of floating prices allows water to mostly wind up where it is currently most urgently needed.
As you can imagine, we talk about water a lot in my country. We seem to have the same key distortions as everyone else: an agricultural sector that is either directly or indirectly subsidised at the expense of everyone else. Sometimes it's an industrial sector that gets the unusually cheap water.
Hayek has an interesting chapter in one of his books[1] (not sure which exactly) about why people distrust the market: it seems like you're being dealt an unfair hand by an invisible agent. And surely if one agent can deal a bad hand, another agent can set things to right.
But there was never such an agent to begin with. It was an emergent phenomenon.
I have a blog post outline somewhere that ties this into faces in clouds and Borges's The Lottery in Bablyon[2]
[1] The chapter title is "'Social' or Distributive Justice", I read it in the collection Essence of Hayek.
[2] http://www.class.uh.edu/mcl/faculty/armstrong/cityofdreams/t...