Water's unique physical properties. complex. economic characteristics, important cultural features, and essential role in supporting all life on earth distinguish it from all other natural resources. These multifaceted characteristics mean that developing effective water policies involves economic, ecological, environmental, legal,·and political considerations. In most societies, political considerations dominate water use decisions. Nonetheless, most water policy options are framed and discussed in economic terms. This paper examines how environmental economics contributes to this policymaking process. The paper outlines how economists have responded to the most recent wave of sustainable development concerns by adapting and expanding the neoclassical framework in ways that provide a compelling view and a practical basis for addressing water-related environmental concerns. It suggests that, whenever possible, incentive-based, market approaches to social goals, including environmental protection, offer the best hope for efficient and sustainable use of water resources.