The investigation began with the generally accepted hypothesis that uncoordinated action by individual water users will result in an inefficient use of water resources, including water quality. The concepts of a private good, public good, joint supply of private and public goods, public 'bads' such as pollution (provided in conjunction with the production or consumption of a private or public good), and ownership externality are introduced and employed to demonstrate the various ways in which the market fails as an allocative mechanism for water resources. Because of the public-good nature of water quality, no organizational structure can be expected to overcome completely the misallocation that results from market failure. Internalization under a single decision unit will still result in arbitrary decisions on matters affecting both allocation and distribution of costs. (Author)