The kink in the aggregate demand curve characterises urban and rural residents’ different willingness to pay. Under normal conditions, efficient allocation is achieved at price PO, total water supply (QOt) is divided among urban and rural users (QOu and QOr), such that their marginal benefits of use are equalised. In case of water abundance, supply exceeds the total demanded quantity, there will be no competition for water resources and therefore the efficient price of water will be PI (opportunity cost of water). Under severe water scarcity conditions (S2) such as droughts, the optimal strategy to minimise total damages is to impose a larger reduction of the water supply on the more price-elastic user, namely agriculture.