Ironically, the world’s most precious resource is also one of its most plentiful. More than three-quarters of the world is literally covered in water. Yet, only 1 percent of the world’s water supply is fit to drink. Ninety-seven percent is salt water, and 2 percent is frozen in glaciers or polar ice caps.

As the Economist made clear in a July 17, 2003 report, there are two problematic trends associated with the way mankind is using this resource.

First, the supply and the demand are out of whack. In some locations, such as Canada and Ireland, more fresh water is available than people can use. In other places, such as the Middle East and northern China, water is scarce. In fact, more than 1 billion people in developing countries do not even have access to clean water.

Second, the world’s population is wasting the water we have. Instead of treating water as an economic good, it is taken for granted in many societies, priced too low, or given away for free. The solution, as we will discuss, may be to place a price on water that reflects its true value and let market forces take control.

If you listen to environmentalists, the situation seems hopeless. For example, a recent report in the Wall Street Journal Online depicts a bleak future in which “massive global water shortages are possible by 2025.”

According to Reuters, that scenario calls for “chronic water shortages with higher food prices and a worldwide grain production loss of 450 million metric tons per year.”

However, it should be noted that the environmental group that made the forecast, the International Food Policy Research Institute, used a computer modeling program to devise the worst-case scenario.

Realistically, the world’s water situation is full of both good and bad news. Here’s the good news. The world’s water supply is not running dry, despite what some environmentalists claim. Rivers, oceans, streams, and lakes are constantly replenished by rainfall. More importantly, the per capita use of water is rapidly declining, even in the United States, the largest consumer of water.

Consider how improvements in industrial production and in consumer products have already reduced the amount of water Americans are wasting. In the 1930s, steel mills used 200 tons of water for every...