The Rio Grande serves as a major watershed to Colorado, New Mexico, and Texas within the United States, areas that are facing large scale increases in development. Additionally, the river makes up the Texas/Mexico border, a region that has also seen an influx in population growth on both sides. As a result of this growth, the International Boundary and Water Commission has stated that the “projected... municipal use [of the Rio Grande] will increase by one-hundred percent over the next fifty years and industrial use will increase by forty percent” in Texas and Mexico alone. Water use has already become a source of conflict, with Texas taking Colorado and New Mexico to the Supreme Court in 2014 over alleged violations of the Rio Grande Compact of 1938, so increased industrial waste within such a scarce resource will only further tensions between the parties.
While this issue may seem exclusively environmental or political, it is actually quite an economic issue at a fundamental level. The interstate conflict over the Rio Grande water allocation identifies the river as both a scare resource and a limiting factor for all growth within the region. Water from the river is vital, not only to the ecosystem, but also to municipalities, industrial growth, and the agriculture that is traditionally the largest industry of the watershed. All of these resources have strong need for water, and the demand for water during a drought or shortage would rise significantly, thereby increasing state’s willingness to pay for increased supplies. As a result, the likelihood of conflict over water resources becomes more likely, as shown with Texas' Supreme Court case.
The interstate element of the river also serves as a prime example of externalities. New Mexico and Colorado have a larger incentive to keep more water and allocate it towards uses within themselves. However, with this is the negative externality of less water reaching the more arid parts of southern Texas and Mexico, creating an upstream/downstream effect. Likewise, increased use of water overall as the region grows will have a negative externality on the watershed’s environment.