Gisser and Sánchez (1980a) state the conditions under which welfare gains from policy intervention are negligible in aquifer management, when compared with non-regulation or “free market” outcomes. This is the so-called Gisser–Sánchez effect (GSE), which has been supported by the ensuing literature during recent decades. The GSE requires a number of assumptions, among which is the disregard for aquatic ecosystems linked and dependent on aquifer systems. The depletion of aquifer systems in arid and semiarid regions worldwide is causing acute water scarcity and quality degradation, and leading to extensive ecosystem damages. This study shows that by including environmental damages into the analytical model, results can change substantially. The analysis highlights both theoretically and empirically the importance of policies in groundwater management, as well as the potential role for stakeholders' cooperation. The empirical application deals with two large aquifers in Spain, the Western La Mancha aquifer which is grossly mismanaged, and the Eastern La Mancha aquifer, which is moving towards sustainable management. Western and Eastern La Mancha aquifers illustrate that policies and institutions are essential to avoid the current global aquifer mismanagement

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Water scarcity is a critical environmental issue worldwide, especially in arid and semiarid regions. In those regions, climate change projections suggest further reductions in freshwater supplies and increases of the recurrence, longevity and intensity of drought events. At present, one important question for policy debate is the identification of water policies that could address the mounting water scarcity problems. Suitable policies should improve economic efficiency, achieve environmental sustainability, and meet equity needs. This paper develops and applies an integrated hydro-economic model that links hydrological, economic and environmental elements to such issues. The model is used to conduct a direct comparison of water markets, water pricing and institutional cooperation, based on their economic, environmental and equity outcomes. The analysis is performed in the Jucar Basin of Spain, which is a good natural experiment for studying water scarcity and climate change policies. Results indicate that both institutional and water market policies are high performing instruments to limit the economic damage costs of droughts, achieving almost the same social benefits. However, the environmental effects of water markets are worrying. Another important finding is that water pricing is a poor policy option not only in terms of private and environmental benefits but also in terms of equity.