The chapter begins with a discussion of the economic rationale for centralized water regulations and reviews the important features of various water pricing methods. It then formulates the pricing scheme that implements the optimal policy. This optimal pricing scheme consists of (i) water prices that vary across users’ sectors (domestic, industrial, agricultural), (ii) a water flow–based charge levied on suppliers of natural water representing to the shadow (or in situ) price of natural water, (iii) a flow-based charge levied on suppliers of recycled water representing the shadow price of this water (associated with the constraint that recycled water supply cannot exceed the flow of treated sewage generated by domestic and industrial users), and (iv) a quota-based compensation for suppliers of environmental water. Special attention is given to the allocation and pricing of environmental water, i.e., water that supports ecosystem services, and to the role of the shadow (in situ) price of natural water. It is shown that the optimal pricing scheme admits cost recovery, in that the water proceeds it generates cover all the variable and capital costs of supply, including the cost associated with construction and maintaining the infrastructure needed to extract, divert, produce (recycled, desalination), convey water to different sectors, and treat the sewage flow generated by domestic and industrial users. The chapter ends with an example based on Israel’s water economy.