Western states are suffering from a long drought. Making matters worse are laws that misallocate water. Laws established over one hundred years ago made it illegal for users of water to resell it to others. Instead, they must “use it or lose it.” As a result, during the drought, water is being used on farms where it has little value, while those in cities face rationing, high prices, or both. Suppose the cost of water to farmers is $10 per acre-foot, while its net of transportation costs is $200 per acre-foot in cities. Why is this inefficient?