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principle of "first in time, first in right." Thus, junior appropriators receive no water until senior ap- propriators-those with the old- est rights-have received their full allotment. · Failure to use water for some period of time results in loss of the right. This provision creates a use- it-or-Iose-it incentive, encouraging withdrawal even when the water place or use to another will com- monly affect third parties-those other than the buyer and seller. When a farmer sells-in effect, transfers-water to a city, the eco- nomic base of the water-exporting community may decline. And when a transfer alters the quantity of water in a stream, other stream users are likely to be affected. In- deed, changes in flow affect the As supplies become scarcer, governments are assuming a more active role in controlling water use. contributes little if any value to the user. Appropriative rights encourage the depletion of waters in a stream. Until recently, such instream flows lacked protection under state wa- ter laws. Unlike riparian rights, ap- propriative rights can be transfer- able, but sales are commonly restricted as to how and where wa- ter can be used. Public permits. Riparian and ap- propriative water rights initially were acquired without state inter- ference. But as supplies become scarcer, governments are assuming a more active role in controlling water use. Some form of a permit system now governs use of at least some water in virtually every coun- try.4 In principle, water permits can be auctioned by governments and bought and sold in private markets. In practice, however, permits are usually free, and transfers are lim- ited by the nature of the right as well as by the infrastructure avail- able to store and transport water. Transferring water from one 56 . FORUM fOr Appli.d R."arch and Public Policy amenities and recreational oppor- tunities that rivers and lakes pro- vide, as well as the individuals who enjoy them. Generally, these wa- ter services are public goods that are not marketed, because the pub- lic cannot be excluded from freely enjoying them. Thus when mar- keting water, the private sector tends to ignore the impacts of wa- ter transfers on the public goods the waters produce. Similarly, pol- luters underinvest in waste reduc- tion and treatment when the costs of using water bodies for waste dis- posal are borne by society rather than the individual polluter. During the past three decades, water-related investments and leg- islation in the United States have been driven largely by a desire to protect the resource and the pub- lic benefits it provides. The result- ing environmental legislation and regulations have contributed to uncertainties over water rights. On one side are the traditional users with rights established when wa- ter was treated as a free resource and environmental impacts were ignored. On the othe side are the more-recently empo ered stake- holders armed with I gislation de- signed to protect an restore en- vironmental and recr ational uses. While domestic, in ustrial, and agricultural users may compete for the water diverted f om streams and reservoirs, all thr e groups vie with environmentalist and recrea- tionists over the amo nt that can be withdrawn. Confli ts also arise over the priority that dam opera- tors give to flood co trot water supplies, hydropower production, fish habitat, and recr ational op- portunities. Without arkets and prices to guide allocat'on of water and guide dam and res rvoir man- agement, conflicts are ften played out in the courts or dministra- tive proceedings. Groundwater In! ially was treated as a resource th t landown- ers could capture at groundwater is often common property resource that ows from one property to anothe until cap- tured for use. Pumpi g can ad- versely affect third pa ties. One party's pumping can educe the water available to ne ghboring water users, forcing the to pump from greater depths an lowering their well yields. Third arties may also be harmed if groun water use reduces surface flows, c uses salt- water intrusion into an quifer, or results in the collapse of lands above underground aq ifers that have been at least partiall drained. The emergence of suc impacts, along with improved kno ledge of the links between groun~ and sur- face water, have led to rjstrictions on groundwater use. In t e western United States, for insta ce, most states have adopted some orm of a permit system for ground ater. But even in states lacking a p mit sys- tem-such as Texas, whic contin-