ABSTRACT:In this paper, we review recent experience with drought in south Florida, and report some results of a study of the likely agricultural economic impacts of drought. Our conclusions can be summarized as follows. (1) Whether a period of low rainfall becomes a “drought” in south Florida is determined largely by institutional factors. (2) The impacts of a drought event are dependent on the rules the Water Management District uses to manage the event. If the rules involve effective reductions in irrigation supply, the financial impacts may be large, but are sensitive to the way in which cutbacks are imposed. (3) Current drought management regulations do not appear to minimize the short‐run cost of drought. (4) Current policies which seek to minimize the short‐run cost of drought are inconsistent with dynamically‐optimal