The market allocation of natural resources: Transactions of water use rights in Chile

Chile is one of the few countries that has encouraged the use of markets in water resource management. In order to assess the impact of water markets and transaction costs in Chile, four river valleys, the Maipo, Elqui, Limari, and the Azapa were selected as case studies. Transactions from the Elqui and Limari valleys, during the years 1986 to 1993, were analyzed to determine the gains-from-trade from market transfers.;In the economic and financial analysis of water markets, crop budgets were used to estimate the value of water in agricultural production. The value of water-use rights to urban water supply companies was estimated using the avoided cost of an alternative investment in a water storage reservoir. The analysis demonstrated that the market transfer of water-use rights does produce substantial economic gains-from-trade in both the Elqui and Limari Valleys. These economic gains produce rents for both buyers and sellers. But buyers, especially farmers growing profitable crops who buy water-use rights and individuals buying water-use rights for potable water supply, receive higher rents then sellers. Large table grape producers in the Limari Valley and individuals buying water for human consumption in the Elqui Valley received the highest rents. In the Elqui Valley total and net gains-from-trade per share were within the range of recent transfer prices of US ;In areas were trading was active, especially the Limari Valley, transactions costs have not presented an appreciable barrier to trading. Nonetheless, in the large canal systems with fixed flow dividers in the Elqui and Maipo Valley there have been very few transactions. Various factors contribute to the presence and lack of trading, but the absence of trading in these large canal systems highlights the costs of modifying fixed infrastructure, especially for trades between farmers.