Water resource development is commonly associated with hardware components, of the water supply system and not the existing institutions and established arrangements. In this paper we inquire into the social cost of the institutional arrangements existing in Israel's water economy, quantify the potential of institutional changes, and assess their capacity to compete with projects aimed at the development of “new” resources. The present situation is examined against situations which might have evolved should institutional barriers be relaxed using a linear programming model of Israel's water supply and farming systems in the various regions and social strata. The findings presented demonstrate the low economic cost of the institutional alternative relative to that provided through new resource developm