Institutions for Managing Ground and Surface Water and the Theory of the Second-Best

We review the theory of optimal conjunctive-use management absent transaction costs as a point of departure for a second-best theory of management. We first explore the problem of optimal pricing of surface water when groundwater remains unregulated. We then move to consideration of institutional mechanisms for managing groundwater. The last section discusses the transaction cost difficulties with water markets and how these can be mitigated with remote sensing technology, much as barbed wire facilitated private property in the American West.