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