Permitted trading has become one of the leading approaches to manage groundwater supplies and mitigate issues such as scarcity, contamination, and aquatic biodiversity loss. Water markets have developed all over the world, reflecting varied priorities and accommodating regional economic, geographical, and political realities. Proponents of these markets extol their efficiency and flexibility, arguing that negotiated transactions provide a transparent process to determine the price of water, and that the voluntary exchange of permits leads to an optimal reallocation of property rights. Further, they allow regulators to place a limit on the amount of total water that can be withdrawn. However, groundwater remains a critically scarce resource in the case of numerous aquifers regulated with market mechanisms around the world. Indeed, continued overexploitation and multifarious concomitant issues such as sinking water tables, pollution, and land subsidence suggest deficiencies in this approach. While a well-designed market may ostensibly ensure that property rights are explicitly defined and that there are no transaction costs, I argue that as aquifers are complexes of dynamic, interrelated systems, such broad policy instruments miss critical confounding variables; where water trading has failed, hydrogeological particularities and the heterogeneous effects of trading over space generate information asymmetries, challenge pricing accuracy, and preclude efficiency. 3 Following a brief explanation of some key terminology, I survey the history of water management in the U.S and discuss the economic justifications of market-based water management efforts. I then conduct a coupled human and natural systems based investigation into why Coasian bargaining may not lead to a Pareto efficient outcome for groundwater permit trading schemes, and the computational, economic, and political sources of market inefficiencies. I find that resource permitting and trading in a free market is not an adequately dynamic groundwater management solution, and leads to a set of unanticipated consequences I refer to as confounding externalities. I perform a case analysis of the Edwards Aquifer in San Antonio, Texas through this framework before suggesting ancillary instruments that may enhance the performance of cap-and-trade schemes.