A number of areas in the United States and the European Union face water shortages because they need to make some basic changes in their water management. Policy options do exist. Most of the options share the common objective of treating water and water services as an economic good, through regulating private inefficient appropriation of open‐access water resources, and making the demand for water more dependent on users’ willingness to pay for it. This article provides an overview of these policy options by illustrating their rationale and possible caveats. We begin by stressing the importance of improving countries’ social capital, i.e., institutional arrangements and management rules for allocating water between competitive uses. We then concentrate on economic approaches to improving water management including the establishment of water markets and the privatization of water utilities. Examples are drawn from the experiences and on‐going developments in the United States and the European Union. This article draws heavily on a chapter entitled “Water Scarcity: Institutional Change, Water Markets and Privatization,” in Economic Studies on Food, Agriculture, and the Environment, Maurizio Canavari, Paolo Cuggiati and K. William Easter, Eds., 2002, Kluwer Academic Publishers, NY.