This article reviews research on the application of economic concepts and tools to the analysis of the preservation, conservation, development, consumption, supply and allocation of water resources. It summarizes research on economic analysis to support policy formulation, implementation and evaluation, including both project appraisal and the design of institutions. Economic analysis can support ex post analysis of existing mechanisms that influence the allocation of water: Such mechanisms include laws, regulations, supply management, demand management, population and climate change. Economic analysis can also be used to conduct ex ante analysis to design future water allocation institutions. These institutions include various forms of marginal cost pricing, valuation of water in alternative uses, water quality management, optimization models, integrated supply and demand management, transboundary management, virtual water, decentralized management, common property institutions and watershed councils.

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