Water Markets: Insights from an Applied General Equilibrium Model for Extremadura, Spain

In Extremadura, a southwest region of Spain, water has been traditionally been seen as an abundant resource, but growing irrigation demands under a low price of about 0.01€/m3 are outstripping the supply of raw water and competing with its other consumptive and non-consumptive uses. To deal with the water scarcity in the region, a water market can be established to achieve the highest value of water use, which may allocate irrigation water to the most efficient users. Hence, a Social Accounting Matrix and Water Accounts (SAMWA) for 2005 is used as a central core to calibrate an Applied General Equilibrium (AGE) model. This model is formulated in the Negishi format which, as a welfare program, can price raw water by its marginal value. The main purpose of this paper is to obtain insights into the potential economy-wide gains from establishing a water market such that this resource is allocated efficiently. The impact of a water market policy is investigated under three scenarios. First, we simulate a decrease in the availability of raw water in Extremadura due to climate change. Second, an investment in a more efficient irrigation technology is considered. Finally, we extend our AGE model by including the amenity services of water and investigate how the willingness to pay of consumers would affect the efficient water allocation. We thus offer policy makers insights into how regional policies could be designed under different circumstances for a better management of raw water in Extremadura.