Assessing the Economic Value of Water in the Colorado River Basin: A Hydroeconomic Analysis

As in many basins worldwide, the imbalance between water supply and demand in the Colorado River Basin, which spans parts of the United States and Mexico, is intensifying due to factors such as climate change and population growth. This paper introduces a novel hydro-economic model encompassing 2.2 million acres of irrigated farmland, 379 cities with a combined population of 33.4 million, and nearly 90% of the basin’s hydropower capacity. The model offers a robust framework for evaluating policy interventions by estimating the value of water across regions and sectors. We find that water use in the basin generates $20.6 billion in annual benefits, $18.3 billion from urban use, $1.4 billion from agriculture, and $874 million from hydropower. Results reveal substantial variation in the marginal value of water within and across states and sectors, providing key insights for designing compensation-based policies and supporting the development of efficient water trading systems.