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Abstract
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 transactions 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 net gains-from-trade per share were within the range of
recent transfer prices of US$1000. In the Limari Valley, gains-from-trade per share are 3.4 times the recent prices of US$3000 for a share of
water from the Cogoti Reservoir.
Where trading was active, especially in 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 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.