Given the myriad of policy instruments aimed at enhancing water quantity conservation available to municipalities, what drives them to opt for a market‐based instrument (MBI)? MBIs can be effective and efficient policy instruments to enhance water quantity conservation, but there is little known about why municipalities utilize them. This study hypothesizes that three contextual elements influence a municipality's use of an MBI: the natural, political, and structural environment. The results from two logistic regression models suggest that in a municipality suffering a higher drought level, both a conservative political environment and operating under a council‐manager form of government (with the effect more pronounced under a non‐council‐manager form) will increase the likelihood that it will use an MBI to address water conservation.