Water scarcity is increasingly viewed as the principal constraint limiting agricultural production and human livelihood improvement in the rural areas of many developing countries. Policies that encourage more efficient and equitable water use - including the introduction of incentive-based water pricing systems - are an important challenge. This paper reports the results of a mathematical programming model which was constructed for the El Angel watershed in northern Ecuador with the goal of exploring the effects of several water pricing alternatives. The model incorporates farmers' crop and pasture planting and resource allocation decisions, based on maximizing regional gross margin subject to land, water, labor, seasonal, food security and other constraints. Four water pricing scenarios are examined. The results show that adequate water resources currently exist to permit a reallocation of water within the watershed, which would generate higher regional production and incomes. Several water pricing alternatives are explored which would discipline water use in those parts of the watershed where water is currently overused and unregulated. Incomes could be significantly increased in currently waterscarce parts of the watershed while generating only small reductions in production and incomes in water-abundant zones. While tradeoffs exist among economic, environmental and employment goals, significant net gains are achievable. If a differentiated system of water prices is considered to be unrealistic, a system of single seasonal prices would likely generate reduced, though significant, benefits. Introducing a system of comprehensive water charges would likely create similar benefits in other developing country watersheds facing similar resource constraints.


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