Water Policy 4 (2002) 423–446 The economic value of water in agriculture: concepts and policy applications $ Frank A. Ward a, *, Ari Michelsen b,1 a Department of Agricultural, Economics and Agricultural Business, New Mexico State University, Las Cruces, NM, USA b Agricultural Economics, Texas A&M University, Texas, USA Received 22 March 2002; received in revised form 26 July 2002; accepted 20 September 2002 Abstract The design of institutions that maximizes water’s beneficial use in the face of growing demands for scarce and random supplies is the central policy issue in dry places. Information on water’s economic value enables decision makers to make informed choices on water development, conservation, allocation, and use when growing demands for all uses are made in the face of increased scarcity. Conceptually correct and empirically accurate estimates of the economic value of water are essential for rational allocation of scarce water across locations, uses, users, and time periods. This review article raises several issues that must be considered in deriving accurate estimates of the economic value of water. These include establishing common denominators for water values in quantity, time, location and quality; identifying the point of view from which values are measured; distinguishing the period of adjustment over which values are estimated; and accounting for the difference between total, average, and incremental values of water. We illustrate values of water for agricultural use, based on a recent drought policy analysis of the Rio Grande Basin. r 2002 Elsevier Science Ltd. All rights reserved. 1. Problem 1.1. Background The need to develop flexible institutions to maximize water’s beneficial use in the face of growing demands for scarce and variable supplies is the most compelling issue for economic $ Supported by New Mexico Agricultural Experiment Station; Texas Agricultural Experiment Station; New Mexico Water Resources Research Institute. *Corresponding author. Tel.: +1-505-646-1220; fax: +1-505-646-3808. E-mail address: frward@nmsu.edu (F.A. Ward). 1 Resident Director, El Paso Research and Extension Center. 1366-7017/02/$-see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII:S1366-7017(02)00039-9