This article examines available methods for assessing all types of drought costs, including both damage costs and costs arising from adopting policy measures to encourage mitigation of, and adaptation to, droughts. It first discusses damage costs, distinguishing between direct, indirect and non-market costs. Then it examines the suitability of existing methods for estimating drought costs in different economic sectors, their underlying theoretical assumptions, complementarity between different methods, and conditions relevant for their application. The latter include precision, ability to deal with future climate change risks, data needs and availability, and required financial and human resources. The article further considers potential policies for drought mitigation and adaptation and different cost types associated with them. It ends with providing recommendations for good practices regarding the use of methods as well as drought mitigation and adaptation policies. © 2012 Springer Science+Business Media B.V.