We present a computable general equilibrium model (CGE) for the Balearic Islands, specifically performed to analyze the welfare gains associated with an improvement in the allocation of water rights through voluntary water exchanges (mainly between the agriculture and urban sectors). For the implementation of the empirical model we built the social accounting matrix (SAM) from the last available input-output table of the islands (for the year 1997). Water exchanges provide an important alternative to make the allocation of water flexible enough to cope with the cyclical droughts that characterize the natural water regime on the islands. The main conclusion is that the increased efficiency provided by ``water markets'' makes this option more advantageous than the popular alternative of building new desalinization plants. Contrary to common opinion, a ``water market'' can also have positive and significant impacts on the agricultural income.

efficiency; general equilibrium analysis; water economics

• Journal Article

• Ag Water Resource Economics