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In this paper, we introduced three-nested Constant Elasticity of Substitution (CES) production function into a static Computable General Equilibrium (CGE) Model. Through four levels of factor productivity, we constructed three nested production function of land use productivity in the conceptual modeling frameworks. The first level of factor productivity is generated by the basic value-added land. On the second level, factor productivity in each sector is generated by human activities that presents human intervention to the first level of factor productivity. On the third level of factor productivity, water allocation reshapes the non-linear structure of transaction among first and second levels. From the perspective of resource utilization, we examined the economic efficiency of water allocation. The scenario-based empirical analysis results show that the three-nested CES production function within CGE model is well-behaved to present the economy system of the case study area. Firstly, water scarcity harmed economic production. Government investment on water projects in Gansu thereby had impacts on economic outcomes. Secondly, huge governmental financing on water projects bring depreciation of present value of social welfare. Moreover, water use for environment adaptation pressures on water supply. The theoretical water price can be sharply increased due to the increasing costs of factor inputs. Thirdly, water use efficiency can be improved by water projects, typically can be benefited from the expansion of watersaving irrigation areas even in those expanding dry area in Gansu. Therefore, increasing governmental financing on water projects can depreciate present value of social welfare but benefit economic efficiency for future generation. (C) 2015 Elsevier Ltd. All rights reserved.