Innovations in economic assessment of drought: an application to the US southwest

Abstract

While numerous studies have examined the economic repercussions of drought, there remains a gap in integrated analyses comprehensively assessing its economic effects, especially where there is no drought adaptation policy under debate calling for a standard cost-benefit analysis. This work's first contribution comes from the development of a non-linear econometric model predicting total county income for several counties and years, for which population growth in some regions showed increasing water use despite the presence of drought. Using the arid southwest US state of New Mexico as a case study for the drought years of 2017–2019, this work develops a second innovation to assess drought damages based on comparing changes in per capita water use from 2015 to those later years. Using those two innovations, total economic damages to water users summed over the three drought years amount to $1.983 billion, just under 1% of the state's total income for that period. Overall, the effects of drought in New Mexico were more modest than anticipated partly because water users in this state showed remarkable resilience in handling water shortages due to several unique structural features of the state's income generation processes.