Markets generate gains from reallocation but can impose losses on individuals and communities. We study whether compensation can address these distributional costs without sacrificing gains from trade. Australia's 2007 Murray-Darling Basin water-market reform provides a unique setting in which to measure both the local losses from reallocation and the productive gains available to compensate them. Exploiting differences in soil characteristics to instrument for reform-induced changes in water use, we document significant local economic spillovers from water leaving irrigated communities. We estimate that a 10% decrease in local water use leads to around a 3% decline in wages, a 7% decline in agricultural employment, and a 4% decline in population. We combine these estimates with a dynamic residential choice model to recover the distribution of community willingness-to-pay for water. The median community values irrigation at AUD $75/ML, with a 90th percentile of $167/ML. These community values are large relative to our estimated median agricultural marginal product of water of $215/ML. We use the joint distribution of private gains and community values to evaluate compensation mechanisms. With full information, private gains from trade can fully compensate selling communities while preserving 76.9% of profitable trades, rising to 92.7% when benefits to buying communities can also finance compensation. When community values are private information, these shares fall to 60.3% and 75.6%, respectively. Our results show how the heterogeneity of local losses, their relationship with reallocative benefits, and the information available to target transfers determine how well markets can share gains from trade.