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Abstract
We study water management in the context of a prototypical water economy. The optimal water policy is specified in terms of water allocations from each source to each user sector at each point of time and the investment in capital infrastructure needed to carry out these allocations. We find that the optimal policy evolves along three stages: a transition stage, where the water capital stocks are brought as rapidly as possible to their respective turnpikes (singular paths); a singular stage, where the water capital stocks evolve along their turnpikes while the natural water stock advances toward a steady state; and a steadystate stage. Optimal regulation by means of water pricing and quotas are discussed. Extensions to non-stationary situations involving growing water scarcity (due to population and climate change trends) and improved desalination technology are considered.