inefficient pricing method such as per area pricing, which is relatively inexpensive to implement, yields a higher social welfare than that obtained with the potentially efficient volumetric pricing method (Tsur and Dinar, 1995, 1997). While these observations may be straightforward, very little empirical evidence or methodology exists for evaluating the practical limitations of various implementation costs

# _Incomplete Information_

One such implementation cost is incomplete information. Whenever irrigation water is priced by some public agency, problems related to incomplete information arise. The user has complete information on his/her marginal water value. Some of this information is private and unavailable to the CWA. For this reason we often see literature referring to this situation as _asymmetric information._ This is so because rational individuals will use private information to advance their own interests (moral hazard) or the CWA may have to spend considerable effort (in the form of increased implementation costs) at society's expense. Zusman (1997) uses the Ramsey-Boiteux formula to assess the total social costs of imperfect information. A comprehensive account, as well as an exhaustive literature survey of regulation with asymmetric information can be found in Laffont and Tirole (1993). Applications to agricultural production are mainly in the context of environmental pollution (e.g., Segerson, 1988; Russel and Shogren, 1993).

Under various conditions, regulators can circumvent the problems associated with certain types of mechanism design. For example, if the CWA charges for irrigation water using per area pricing, it is not necessary to know users' marginal value for water. It is, however, possible to infer the users' marginal value of water through various revelation mechanisms. This burgeoning strand of economic literature (direct revelation mechanisms) springs from the pioneering work on informationally decentralized systems (Hurwicz, 1972) and on mechanism design and principal-agent theory (Hurwicz, 1973; Groves, 1973; Laffont and Tirole, 1987). There are few examples directly related to water pricing; initial efforts include the works of Loehman and Dinar (1994) and Smith and Tsur (1997).

The pervasive case of unmetered water well illustrates one aspect of incomplete information. Because the CWA does not have complete information on the value of the water to heterogenous fanners (adverse selection) there is the incentive for the farmer to under report actual usage (moral hazard) if water is priced volumetrically. Due to the high costs of implementing a meter system often times the CWA will use per unit area pricing in these cases. Smith and Tsur (1997) use mechanism design theory to propose a water-pricing scheme, which depends only on observable outputs. They find in the absence of implementation (transaction) costs that this mechanism will achieve first-best allocations. If transaction costs are included, first-best allocations are not possible, but second-best allocations are. It is assumed that the CWA does have complete information on farmer (i)'s technology. However, by introducing a series of nonlinear taxes on ouputs, this technology can be deduced, hence revealing directly farmer (i)'s marginal water values. The use of this mechanism may involve prohibitive monitoring costs, i.e., the CWA needs to observe farm output for each farmer. Monitoring may be relatively simple, as 12