Rainwater harvesting is increasingly viewed as a practical means of reducing stormwater runoff and supplementing water supply in water-scarce regions, although its widespread adoption has been limited in urban areas. While a number of studies have examined the potential of rainwater harvesting to reduce potable water use, stormwater runoff, energy associated with delivering potable water supplies, or the associated costs, none have assessed these costs and benefits collectively. Using a densely urbanized watershed in southern California as a test case, this study quantifies the economic benefits and costs of rainwater harvesting to investigate whether capturing and using rainwater can be an efficient regional policy. Given the watershed's land use, topography, and rainfall variability, a range of cistern sizes is evaluated to estimate the magnitude of water, energy and carbon savings for two rainwater use scenarios: outdoor use only and outdoor plus non-potable indoor use. With water prices held constant, only the smallest cistern (208 l) used for outdoor irrigation is efficient from an economic standpoint. In contrast, with a modest annual increase in water rates over the life of the project, the study shows that rainwater capture for outdoor use is an efficient policy for any cistern size. Finally, due to the higher installation and maintenance costs required to pipe the water indoors, outdoor/indoor uses show only modest economic benefits. The potential volume of water captured annually is significant, depending on the cistern size, equivalent to the total water needs of 13,345 to 31,138 single-family residences.