This paper studies barriers to water trade in California's surface water market. Despite significant price disparities between users, less than 5% of surface water is traded annually. Commonly cited frictions include the costly management of trade externalities due to incomplete property rights, hydrological interdependence, and infrastructural constraints. I build and estimate a model of California's water market to decompose these frictions and simulate counterfactual market designs that balance transaction costs and externalities. My model features agricultural production, urban demand, hydrological externalities, and bilateral transaction costs. I find that incomplete property rights and constraints on an important bottleneck in the system represent significant sources of friction. Despite qualitative concern about the regulatory burden of managing externalities, current policies trade off externalities and transaction costs well. I estimate that new infrastructure coupled with streamlining water rights management would quadruple trade volume, increase agricultural profits by 10%, and increase environmental water supply. While these interventions reduce misallocation amongst farmers, they do not significantly benefit urban buyers.