ABSTRACT Water pricing in Israel led the water situation to become almost disastrous. This was true for both quantity and quality issues. This paper deals with a proposed price reform and its implication for two issues. The first is the optimal timing to switch to a backstop technology--desalinating water in this case. Economic analysis shows that combining both demand and supply management can postpone desalinization projects by more than 20 years. The second issue deals with changing the price block schedule in order to compensate farmers for a given price change. Increasing the marginal price of water to its real value damages the marginal users. The paper tries to calculate and proposes a new price block schedule that will leave the farmers as well off as they were before the change.
