I use colors to relay alot of information quickly, and to help differentiate between different areas on the map.
For example, a map will have color-coded terrain and temperature. Any players or objects appear as a red background on the map, so that the player can still see what type of terrain that player or object resides on. Whatever object you currently control appears as a blue background on the map.
So this creates maps that are quite color intensive, if the terrain is non-homogenous and there is alot going on. But it's almost necessary to convey all of the information without writing my own graphical client.
I tend to think of text as the same way. If there is an important piece of information (such as a keyword), I like to have it highlighted so that it stands out to players. Consequently, I dislike "hunt the keyword" puzzles that some muds employ. But all of this depends on what kind of game you're trying to run.
As for giving players the ability to choose colors, that's both a good and a bad idea. Within reason, colors can augment a conversation by highlighting and giving a certain tone to certain words. But 99% of the world will just use it to make flashy annoying messages where the content is lost in the noise. Perhaps it would be useful to limit player input to one or two color-codes per command, as more is rarely needed.
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