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The ideal water contract for a heterogeneous population of users is a prioritized right that is fully vested and fully tradable. A set of tradable, prioritized rights contracts will span the same space as the Debreu contingent commodities. Therefore, they lead to a competitive equilibrium that is Pareto optimal. Equal sharing of water shortfalls does not have this property.Existing water policies in Israel and the Disputed Territories are not characterized by an efficient set of water contracts. The system misallocates water over both time and space.Current policies are driven by strategic and ideological objectives. With peace, reform of water policies will become politically feasible. The paper concludes with a proposal for a new water-allocation system.
