ABSTRACT
This chapter explains how the competing demands can be minimised through a careful use of key instruments, such as designated rights, capacities to trade and variable pricing that reflects scarcity. It focuses on the physical costs associated with water supply and the need to distinguish between the component of water supply that is natural and the component that depends on human effort, ingenuity and investment. Efficient use of water demands that the price of water needs to reflect both the cost of water supply and the cost of water use. However, global water supply and pricing regimes tend to exhibit a number of key characteristics. The issue of water quality relates to the issue of externalities—another important component of the economic cost of water supply and use that is rarely reflected in the price. Clearly defined property rights are one such instrument that can further improve the efficiency of water use.
