What is the correct way to share package version with setup.py and the package?

Set the version in setup.py only, and read your own version with pkg_resources, effectively querying the setuptools metadata:

file: setup.py

setup(
    name='foobar',
    version='1.0.0',
    # other attributes
)

file: __init__.py

from pkg_resources import get_distribution

__version__ = get_distribution('foobar').version

To make this work in all cases, where you could end up running this without having installed it, test for DistributionNotFound and the distribution location:

from pkg_resources import get_distribution, DistributionNotFound
import os.path

try:
    _dist = get_distribution('foobar')
    # Normalize case for Windows systems
    dist_loc = os.path.normcase(_dist.location)
    here = os.path.normcase(__file__)
    if not here.startswith(os.path.join(dist_loc, 'foobar')):
        # not installed, but there is another version that *is*
        raise DistributionNotFound
except DistributionNotFound:
    __version__ = 'Please install this project with setup.py'
else:
    __version__ = _dist.version

I don't believe there's a canonical answer to this, but my method (either directly copied or slightly tweaked from what I've seen in various other places) is as follows:

Folder heirarchy (relevant files only):

package_root/
 |- main_package/
 |   |- __init__.py
 |   `- _version.py
 `- setup.py

main_package/_version.py:

"""Version information."""

# The following line *must* be the last in the module, exactly as formatted:
__version__ = "1.0.0"

main_package/__init__.py:

"""Something nice and descriptive."""

from main_package.some_module import some_function_or_class
# ... etc.
from main_package._version import __version__

__all__ = (
    some_function_or_class,
    # ... etc.
)

setup.py:

from setuptools import setup

setup(
    version=open("main_package/_version.py").readlines()[-1].split()[-1].strip("\"'"),
    # ... etc.
)

... which is ugly as sin ... but it works, and I've seen it or something like it in packages distributed by people who I'd expect to know a better way if there were one.