ABSTRACT
This chapter discusses some general economic considerations regarding the allocation of water, touching on the role of government. The research program from which it derives arose from concerns how irrigation water might best be allocated and financed in Third World countries. Government revenue and pricing policies lower farmers' valuations of water. "Cost allocation" is the process of assigning an appropriate share of joint multipurpose project costs to each project purpose or user class and is a basic measurement issue in designing appropriate pricing or cost-sharing policies. The initial conceptual framework established that an estimate of the marginal benefit was necessary in establishing a pricing policy, no matter what pricing principle was to be applied. Long-run efficiency concerns are probably much more important than the shortrun distortions in allocative efficiency produced by current pricing policy. The Marginal Cost Pricing Principle is the rate-setting rule applied where allocative efficiency is the primary objective.
