On theoretical grounds, water markets provide the most efficient solution to balance water supply and demand, but imply transaction costs, resulting from technical or political barriers, which may substantially reduce the resulting gains from establishing a water market. The aim of this paper is to show, by simulating a water market, the influence on market gains of the productivity difference between firms in the presence of transaction costs. We will show that such differences determine the efficiency of water markets and we calculate the minimum heterogeneity level that compensates the costs generated by markets in the specific case of an irrigation area located in Ebro Valley.

Key words: water markets, heterogeneity, transaction costs, efficiency gains.
JEL classification: Q12, Q25.