Agricultural production in Egypt is virtually fully dependent on irrigation. Egypt gets more than 95 percent of its annual renewable water resources from the Nile, and the construction of the High Aswan Dam, which was completed in 1971, has allowed Egypt to take full advantage of its share of Nile flows and increase both cropping intensity and size of the cultivated area. Egypt may face significant water scarcity within the foreseeable future, however, because of the combination of a more or less fixed supply of fresh water and increasing demands for water owing to population growth and reclamation of desert land for agricultural production. Because agriculture is the major water user in the Egyptian economy, it will be important to ensure efficient allocation of irrigation water across users and uses. In situations characterized by water scarcity, irrigation activities may be associated with several types of externalities, which in turn have implications for water use efficiency. A classic externality is when some farmers are able to appropriate as much water as they like while the other farmers receive only what is left over, resulting in possible drought damage to their crops. Another type of externality arises because not all water applied to the fields ends up being consumed (that is, evapotranspired) by the crops. Parts or all of the excess water may subsequently be returned to the basin water system and become available for another diversion cycle. Thus, even if individual farmers use inefficient irrigation technologies, this need not result in large water losses at the river basin level. Both of these externalities are present in various regions in Egypt and should be considered when designing policies for efficient allocation of irrigation water. Using water in a socially efficient manner is not merely a question of physical efficiency in water use. Whereas improving physical efficiency is about conserving water by increasing the share of water applied that is beneficially used, increasing economic efficiency is about maximizing the economic value of water use through physical measures and allocation of water between water uses and users (Cai et al. 2001). Within the cropping sector, economic efficiency may be improved by reallocating water from low- to high-value cropping activities or in some cases by adjusting the choice of production technique and using deficit irrigation (that is, applying less than the full crop water requirement). Many different policy instruments can be used to regulate farmers' use of water. The options include volumetric taxes and non-volumetric taxes (like crop-specific land or output taxes), various types of quotas, market-based allocation mechanisms, and user-based allocation mechanisms. The degree of efficiency that can be achieved in water allocation differs across these policy instruments, and so do the costs of implementing the policies. Regulating farmer water use has not only efficiency implications, however, but also distributional implications. Stakeholders in irrigation water allocation issues may be roughly divided into three groups: farmers, agents outside agriculture like industries and households, and agents in other countries. Although efficiency in water allocation policies should be an important matter for everyone in regions with water scarcity, stakeholders are also likely to be highly concerned with the distributional implications, which depend on the choice of policy instrument. All these aspects consequently must be taken into account when choosing what policy mechanisms to use for allocating scarce irrigation water resources in Egypt and elsewhere. Your assignment is to discuss the efficiency and distributional implications of using tax policy instruments versus quota policy instruments to regulate farmers' use of irrigation water. Then, based on the features of the Egyptian economy and irrigation system, design a policy strategy for regulating farmers' use of irrigation water in Egypt, considering economic efficiency aspects, implementation costs, and stakeholder issues.