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Because each party's use and manipulation of a stream or other water source may affect the interests of all other users of that resource, water uses are typically governed by a body of law, custom, and related institutions that define the rights and obligations of each entity. Such institutions have evolved in response to the characteristics of local water supplies, the demands placed on those supplies, and the types of conflicts that have arisen between competing water users.

In the western United States, the scarcity and variability of water supplies, coupled with the predominance of out-of-stream consumptive uses (e.g., crop irrigation), led to adoption of the prior appropriation system of water law (Chandler, 1913; Tarlock, 1989). As streamflows fluctuate, whether due to drought, regular seasonal variation, or sporadic storms, the availability of water to any particular user is determined by the position of that user's right in the priority hierarchy. The oldest rights have highest priority. The familiar statement of the principle is: ''first in time, first in right.'' In the eastern states, the relative abundance of surface water, together with the historical importance of instream water uses (e.g., to power mills) favored the riparian system of water law. Under that system, owners of stream-side properties share coequal rights to reasonable use of the water resource (Clark, 1970; Tarlock, 1990; Rose, 1990). In the modern era, the riparian doctrine states of the United States have largely shifted to a system of state-issued permits (Abrams, 1990; Sherk, 1990). These different legal traditions continue to shape water use and management and to affect the impacts of a drought and the options for responding to it (Miller et al., 1997). The drought management tools available in the western United States include short-term water transfers from willing sellers to willing buyers. Such voluntary marketing generally is not possible in the riparian tradition states, where state agencies may play a central role in allocating water supplies during drought emergencies.

Responses to seasonal-to-interannual variations in water supply historically have taken the form of long-term investments in surface water storage, groundwater pumping capacity, and transbasin diversions. In the western United States, where rapid population growth has surged on watersheds in which farmers and ranchers long ago appropriated the reliable streamflows, municipal water suppliers and other new users often permanently purchase water rights from irrigators and other senior users to obtain reliable supplies. Infrastructure investments or permanent water transfers can insulate out-of-stream water uses and some navigation and hydropower uses from many of the effects of seasonal-to-interannual variations in runoff, although often at the expense of environmental, aesthetic, and cultural values. For example, reservoir operations may remove water from streams and damage aquatic habitats,

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