Optimal allocation of watershed management cost among different water users

The issue of water scarcity highlights the importance of watershed management. A sound watershed manage- ment should make all water users share the incurred cost. This study analyzes the optimal allocation of watershed management cost among different water users. As a consumable, water should be allocated to different users the amounts in which their marginal utilities (MUs) or marginal products (MPs) of water are equal. The value of MUs or MPs equals the water price that the watershed manager charges. When water is simultaneously used as consumable and non- consumable, the watershed manager produces the quantity of water in which the sum of MUs and/or MPs for the two types of uses equals the marginal cost of water production. Each water user should share the portion of watershed management cost in the percentage that his MU or MP accounts for the sum of MUs and/or MPs. Thus, the price of consumable water does not equal the marginal cost of water production even if there is no public good.