in the case of Egyptian wheat marketed thiough a government marketing board, or very difficult as in the case of a large irrigation project suipplying many small subsistence farmers".

# _Externalities_

There are externalities associated with water provision to the environment (pollution) or to other interest groups (third party effects), that is. when one person's decisions do not take into account the negative effects on others. Economists have advocated the use of pollution taxes as a means to address environmental externalities (EUaumal and Oates, 1989). When implementing water irrigation systems and the marketing of thLose services often there are conflicts that arise out of such things as return flows (third party externalities). The potential for these depends on the nature of the irrigation system. One example concerns recent reluctance to engage riew large dam projects both in LDCs and in the MI)Cs (e.g., Sardar Sarovar Dam, India - Postel, 1999). Third party effects of return-flow from large irrigation darn projects recently have accounted for environmental degradation in Colorado. The irrigation and hydroelectric projects along the Snake and Columbia Rivers have signiicantly altered flow quantity and timing, which has adversely affected salmon populations (NVillis et al., 1998). MacDonnell et al. (1994) discuss the third party effects of American West damns and water banking. They investigate three types of third party effects: impacts on other wati-.r users, local economic impacts on parties other than water users, and impacts on environmental values. rhe difficulty in managing these effects is measurability of the impacts. A variety of water conditions, irrigation systems, and their potential stock externalities are summarized in Easter (1999).

# _Scarcity_

There are many ways that pricing mechanisms can be used to address scarce water supplies. During seasonal shortages, higher marginal cost prices should be used to ration all of the water and to recover fixed costs during peak demand (Seagraves and Easter, 1983). Many informal allocation systems have developed in the absence of prices or formal markets to address scarcity. These traditional, communal arrangemerts have often operated successfully for many years, but may not be efficient or equitable: _warabandi_ system in Pakistani (Easter and Welsch, 1986) and India (Perry and Narayanamurthy, 1998), _subaki_ system in Bali (Sutawan, 1989), and the _entornador-entornador_ system in Cape Verde (Langworthy and Finan, 1996). When flows are uncertain, shares rather than volumes of water can be allocated to individual farms. When these shares are tradable, efficient allocations can be achieved by equating marginal values across users (Seagraves and Easter, 1983).

Another mechanism to cover scarcity ccosts is the introduction of a fixed charge to balance the budget of the CWA. In this manner the short-run efficiency of marginal cost pricing can be extended (using a two-part tariff method) to account for long-run fixed cost considerations. Similarly an annual _Pigouvian_ tax can be used to manage scarcity. This avoids distortionary affects of other taxing forms and is therefore capable of achieving long-run efficiency (Laffont and Tirole, 1993; Tsur and Dinar, 1995). Examples of endogenously determined water prices under uncertain supply can be found in rsur (1990, 1997), Tsur and Graham-Tomasi (1991), and

> 15 Interesting to note are the advances in satelliti, remote sensing methods to collect irrigation data in a cost effective manner. An example for India can be found in Thiruvengadachari and Sakthivadivel (1997). These may further reduce costs associated with asymmetric infonriation.

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