Water is a critical resource in many activities, including domestic use (e.g. cooking, cleaning, and drinking), food production, power generation, transportation, many commercial and manufacturing processes, pollution assimilation, recreation, and many biological and ecological processes. Changes in the spatial and temporal distributions of runoff, and in the quality of water, can have profound social and economic consequences. Such changes are projected by some climate researchers as a result of increased atmospheric concentrations of greenhouse gases (IPCC, 1996). The symptoms of climate change, including sustained changes in temperatures, precipitation patterns, and the frequency and intensity of droughts and storms, may signal the need for changes in water-use patterns and other strategies to mitigate the impacts of climate change.

In a comprehensive assessment of possible climate change effects, it is important to consider both the physical and economic dimensions of the change. Existing assessments of climate change impacts on water resources have been largely based on the results from physical models, which have simulated changes in runoff and occasionally in water-use patterns. The value of these assessments, however, is limited by the absence of economic adjustment, specifically the response of water users to changes in water scarcity (i.e. prices). To describe more completely how the changes in water availability and climate affect social welfare, it is necessary to integrate models describing the physical effects (e.g. hydrologic changes) with models describing economic and institutional responses.