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Assessing the economic consequences of potential water supply shortages can help water agencies determine the need for investment in long-term protection from drought. In Phoenix, Ariz., the risk of drought damage in the long term justifies the need for additional drought protection through developing standby groundwater supplies and implementing permanent demand-reduction measures. The most efficient way of dealing with the risk of drought in Phoenix is to maintain the existing standby groundwater supplies, add new wells, and develop a moderate, temporary demand-reduction program. Without reserve wells, the city would have to resort to additional expensive supply acquisitions or very stringent restrictions on water use during periods of severe drought. Includes 10 references, tables, figures.