et al., 1993; Roe and Diao, 1995, 1997; Coulder et al., 1999) or water (Diao and Roe, 1998) in all sectors of the economy due to the scarcity of accurate data. One recent GE examination of water pricing was conducted for industrial, domestic, and agricultural consumption in Canada (Renzetti and Dupont, 1999). Their simulations evaluate potential benefits and costs of a twopart pricing policy (permits and volumetric charges) on many sectors.

# _Externalities_

Trade in the presence of externalities has been used to evaluate the optimal choice of environmental protection. A recent exanmple (Kohn, 1998) illustrates that under a simple Nashgame scenario using the traditional Hecksher-Ohlin-Sarnuelson model both countries will opt for environmental taxes. Similarly, the eff-ct of regulating shared water aquifers between two countries has been modeled using GE theory (Roe and Diao, 1995, 1997). This later study endeavors to describe a situation found where two countries share water resources and thus the water-use decisions of each country will affect the water availability of the other country (e.g., Israel, Jordan, Gaza, and the West Bank). With the introduction of the externality (country A (B) affects the amount of water availability to country B (A) depending on its water generation amount) they view the competitive equilibrium as Nash equilibrium. Contrary to standard Hecksher-Ohlin factor price equalization, the resulting differences in water supply and demand between the two countries will generate different prices for water, labor and capital in countries A and B. The effects of various unilateral and bilateral water policies are then simulated.

# _Trade_

Diao and Roe (1995) examine the we',fare effects from liberalizing trade in a North-South framework. They focus on the environmental effects of changing trading patterns when pollution enters into health consumption via a modified Stone-Geary form of utility. This model can be modified to expressly examine water pollution. This model is developed in Diao and Roe (1998), where they examine the effects of trade and water market reform in Morocco. The crux of this study is to determine the optimal sequence of reforms in the Moroccan economy keeping pragmatic political economy consideration in mind"<sup>7</sup> . Reform, as such, implies that the efficiency of the existing system will be improved, however, reform is not static and must be viewed as a process. Diao and Roe (1998) do a very compelling job of showing how such reform might be sequenced to allow for the losers in the reform process to be partially compensated, and thereby made to be nmore willing to engage in the reforms. By doing so, the authors have made a strong empirical a]rgument in favor of using GE analysis to examine water pricing issues.

Vaux and Howitt (1984) developed a G3E approach for inter-regional water trade. They use a _spatial equilibrium_ approach derived from a quadratic programming model. The Vaux and Howitt model examines the interregibnal equilibrium supply and demand relationship for California (five demand sectors and eight supply sectors). They estimate that if trade is not allowed and the development of new water sources is exclusively used to meet increasing demand the resulting prices for all regions are dramatically higher. By allowing a market-based

> 17 Despite a clear comparative advantage in the production of irrigated exportables (fruits and vegetables) Morocco continues to protect the wheat and industrial crop sectors to its collective disadvantage. Any water development strategy occurring in this biased agricultural system may lead to further inefficiencies in water allocation and be actually welfare decreasing.

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