The old adage that water seeks its own level does not apply when it comes to regulated prices. Instead of letting prices be determined by supply and demand, government rules and regulations -- prompted by political consideration -- almost always set the price too low, encouraging waste and promoting shortages, economists point out.

• Yet data confirms that when cities raise the price of water by 10 percent, water use declines by as much as 12 percent.

• But according to the American Water Works Association, only 2 percent of municipal water suppliers adjust prices seasonally -- while 33 percent offer quantity discounts to heavy users of water.

• Eastern water laws bar people from buying and selling water -- which largely explains why water restrictions had to be imposed in eastern states during this year's drought.

• Western states, on the other hand, have discovered the role of the market in automatically regulating supply and demand -- rather than having government bureaucrats make the decisions.

Specifically, California has established a drought-emergency water bank. The bank allows farmers to lease water from other users during dry spells. In 1991, the first year the bank functioned, when the price was $125 per acre-foot, supply exceeded demand by two to one. More people wanted to sell water than wanted to buy it.

When water is allowed to trade, market prices generally average between $200 to $800 per acre-foot. Developing new supplies can be much more expensive -- with desalinization costing as much as $2,200 per acre-foot, and reservoir construction being even more expensive.

Source: Terry L. Anderson and Clay J. Landry (Political Economy Research Center), "Trickle-Down Economics," Wall Street Journal, August 23, 1999.