The colors reflect her emotions.
In the real story of little mermaid (the Grimm fairy tale), The girl that the prince is in love with is not the evil witch. If Ariel wants the prince to love her, she has to kill the other girl with a special knife given to her by the sea witch. Ariel sees how happy the prince is with the girl she has to kill, and for the prince's sake, kills herself instead. She becomes the princess of the sea foam. This is the scene where Ariel is trying to decide what to do with the knife. (in the real fairy tale, Ariel does turn human so she is a human/pony in this one)
