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Groundwater is being depleted on a large scale in many arid and semi-arid parts of the world. It is often said that this precious resource is being wasted at the expense of future generations. But should ground-water depletion be avoided at any price? Or is depletion desirable in certain circumstances? If there is to be a reduction in groundwater depletion, how can it be achieved? And how can limited water resources be allocated to their most valuable uses? The author addresses these issues by undertaking an economic analysis, and considers the political and hydrological aspects of water management. Various methods of assessing the economic value of water are presented, a hydroeconomic model is developed to enable the economic value of groundwater stocks in differrent circumstances to be estimated, and a framework for the analysis of agricultural-urban water transfers is introduced. Eight types of groundwater management policy instruments are discussed on the basis of both theory and international experience.