With rapid industrialization and urbanization, scarce water resources are more and more being transferred from low-value agricultural use to high-value industrial and domestic uses in China. Along with water shortages, inefficiencies are apparent in Chinese agricultural water utilization. The causes of these inefficiencies include attenuated property rights, artificially low water prices, lack of farmer participation in irrigation districts management and fragmented government management. It is concluded, against the background of a transitional economy, that the lack of economic incentives in the allocation of water is the principal reason why shortage and waste coexists in Chinese irrigated agriculture. The challenge now facing decision makers is how to resolve the conflict between increasing food demand and decreasing water supply without undermining the growth of cities and the industrial sector. Owing to failures in both markets and government in water allocation, it is argued that it is necessary to establish a quasi-market for water.

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