ABSTRACT
In this chapter, the authors examine how our economic and political institutions have allocated the important resource in the past and how they might improve on its allocation in the future, the likelihood and severity of water scarcit and the menu of opportunities for meaningful institutional reform. The earth’s renewable supply of water is governed by the hydrologic cycle, a system of continuous water circulation. In the absence of storage, the allocation of surface water involves distributing a fixed renewable supply among competing users. An efficient allocation of surface water must strike a balance among a host of competing users and supply an acceptable means of handling the year-to-year variability in water flow. Abundant surface water in proximity to the location of the groundwater could serve as a substitute for groundwater, effectively setting an upper bound on the marginal cost of extraction. In efficient groundwater markets, the water price would rise over time.
