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Abstract
South Africa is entering a whole new era in water management. In the face of efforts to
curtail runaway government spending and protect the environment, water institutions must
foster the conservation and efficient allocation of existing supplies. They must also take
water's growing recreational and environmental value into account. The crucial question is,
can the current water institutions meet today's requirements? Despite the resulting
inefficiency and waste, traditional resource economists continue to identify taxes,
regulations, subsidies, and governmental allocation as solutions to today's water problems.
Internationally, there is enough evidence to prove that central allocation with almost any
resource gave rise to gross inefficiency. The main reason is the distortions on the value placed
on resources within such a centralised planning environment. Resources are either valued to
high or to low. What is the value of freshwater and how can water be allocated in such a way
as to reflect the scarcity value of water? A non-linear spatial equilibrium model was
developed to simulate the impact of a potential water market in the Upper-Berg River:
Western Cape. This paper explores water markets as an alternative to central water allocation
decisions