Alternative mechanisms for water transfers will differ in the types of transaction costs incurred as well as their magnitudes and incidence. This article presents a framework for including transaction costs as well as transfer costs in the evaluation of alternative mechanisms. The work on measurement of transaction costs associated with water markets has underestimated these costs by only focusing on the costs incurred once a market exists. The framework presented here also includes the costs associated with the development of a market mechanism. Once the appropriate framework has been developed, there are a number of measurement issues involved with incorporating transaction costs in the overall assessment of the efficiency of water allocation mechanisms. While the costs involved with the final transaction are relatively easy to measure, those involved with the initial information gathering, policy enactment, and design and implementation of a formal market mechanism are rarely documented. Similarly, it is much easier to measure transaction costs after the policy is implemented; however, it is necessary to predict costs to inform decision-making and improve policy design.