On the Economics of Water Allocation and Pricing

I present the economic principles of water allocation and pricing in a schematic water economy representing a wide range of real-world situations. The water policy has inter- and intratemporal components. The former determines extractions from the naturally replenished sources, given the stochastic nature of recharge processes. The latter is concerned mainly with the allocation of the extracted and produced water among the end users. The optimal water prices associated with the intratemporal allocation task are derived. Implementation of the optimal policy is discussed.