From the earliest times, water resources have been allocated on the basis of social criteria - maintaining the community by ensuring that water is available for human consumption, for sanitation, and for food production. Societies have invested capital in infrastructure to maintain this allocation. Yet social change, including changes in (and more understanding of) how goods are distributed, has produced new issues in water allocation. Population growth has made water scarcity a major problem in many countries and water pollution, while by no means a recent problem, is more widespread than ever before. Traditionally the state has played a dominant role in managing water resources, but inefficient use of water, poor cost recovery for operating and maintenance expenses, the mounting cost of developing new water sources, and problems with the quality of service in agency-managed systems has led to a search for alternatives that make water allocation and management more efficient. The authors address some of the basic principles of treating water as an economic good and of allocating it among the sectors. After outlining the economic principles behind allocating scarce water resources, they review the actual means of various mechanisms used for allocating water, including marginal cost pricing, social planning, user-based allocation, and water markets. Giving examples from experience in several countries, they weigh the pros and cons of different approaches to water allocation, showing that no single approach is suitable for all situations. Clearly that state must play an important regulatory role, for example, but how effectively it does so depends on the relative political influence of various stakeholders and segments of society. User-based allocation is generally more flexible than state allocation, but collective action is not equally effective everywhere; it is most likely to emerge where there is strong demand for water and a history of cooperation. The outcome of market allocation depends on the economic value of water for various uses, but moving toward tradable property rights in water may ease the process of intersectoral reallocation by compensating the"losers"and creating incentives for efficient water use in all sectors.