This dissertation evaluates the governance, policy, and economics of improved water quality in the Delaware Basin, an interstate watershed in Delaware, New Jersey, New York, and Pennsylvania. The watershed or river basin approach is examined as a means to manage the water resources of interstate river systems. The organization and budget structure of the Delaware River Basin Commission (DRBC) is compared to other prototypical institutional models of interstate river basin management in the United States. A benefit-cost analysis is applied that employs a watershed pollutant load model to estimate market and nonmarket benefits, marginal abatement cost curves, and net benefits to determine optimal costs of water quality improvements to meet a more protective year-round fishable standard in the Delaware River. Results show that the annual benefits of improved water quality to achieve a future dissolved oxygen standard of 5.0 mg/l in the Delaware River range from $370 million to $1.06 billion at an annual pollutant load reduction cost of $449 million. The most cost effective DO water quality standard is 4.5 mg/l defined by the intersection of the marginal benefits (MB) and marginal cost (MC) curves or the point where willingness to pay (WTP) for improved water quality equals the marginal costs of pollution reduction. This optimal criteria (4.5 mg/) can be achieved within a cost range of $150 to $350 million with benefits that range from $150 to $950 million per year. Market-based mechanisms such as user-polluter pays approaches and water quality trading are explored as alternatives to traditional Clean Water Act regulations to incentivize and fund Delaware River water quality improvements. This research concludes that the DRBC has the requisite authority under a Federal/state compact to manage the Delaware River as a single entity and has the capability to tap beneficiary-pays revenue streams to fund water quality programs in an interstate basin that supplies drinking water to 5 percent of the population of the United States.