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Estimating Water Rights Demand and Supply: Are Non-market Factors Important?

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Abstract

Water rights demand and supply in the upper Maipo river basin (Metropolitan Region of Chile) are estimated for the period July 1998 to June 2003, as well as a reduced form model for the equilibrium water rights price based on supply and demand determinants, as well as characteristics of the participating agents such as the economic sector of each agent and their individual market experience. Results show that the main participants in the market are both agriculture and real estate sectors (developers); agriculture buying 57 % and selling 68 % of transactions. The estimated supply and demand system shows that market forces indeed drive market water right prices. Demand is inelastic to price while supply is highly elastic. Furthermore, supplied and demanded water rights quantities are functions of water right price as well as the economic sector of buyer and sellers, sectoral profits, and geographic location of the water right. Additionally, the agent’s previous water rights market-experience is an important determinant of water rights demands and supply.

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Notes

  1. A water entitlement in Australia is the maximum amount of water authorized to be taken and used by a person under specific conditions/specifications; however, the Government retains the overall right to the use, flow and control of all surface water and groundwater. This definition is similar to Chile’s definition of a water right, and thus from here on we use the term water right. Water entitlement prices refer to the value of the water right; thus, it is the value obtained in the permanent water right market.

  2. In Australia, water allocation is the amount of water actually available for use or trade under an entitlement to water in a given year. The allocation depends on the conditions during the year and in a dry year, an allocation will be reduced. A water allocation price is the exchange value for water in a given period. The transaction does not imply the transfer of water rights and, thus, this represents a spot market. Chile’s Water Code of 1981 does not specify water allocations. Each WR indicates the maximum water flow the WR holder is allowed to extract, when there is sufficient water flow to satisfy all of the permanent consumptive WRs. In the case that there is not sufficient WR can extract a proportion of actual water flows; the proportion is defined by the percentage that the water flow of the WR represents of the total granted water flows.

  3. Chile’s Water of 1981 specifies consumptive water rights for both surface and groundwater, and non-consumptive water rights for surface waters. Non-consumptive water rights allow the owner to divert water from a river with the obligation to return the same water unaltered to its original channel. Consumptive use rights do not require that the water be returned once it has been used. Consumptive and non-consumptive water rights are, by law specified as a volume per unit of time. However, given that river flows are highly variable in most basins, these WR are recognized in times of scarcity as shares of water flows. This study centers only on consumptive water rights market and, thus, we use the term water rights from here on.

  4. WR trading existed prior to the Water Law of 1981. There is evidence of WR trading under the Water Code of 1951. However, this water code did not explicitly allow for the creation and operation of efficient WR markets.

  5. A river section consists of the geographic area where the river flow begins (or restarts) and its water flow is extinguished. These sections are treated legally as independent areas and the total quantities of water rights are defined for each river section.

  6. There are no interanual reservoirs in the Maipo Basin, thus WR in the basin are defined in terms of water flows.

  7. This equivalency is the average available water flow per permanent consumptive surface WR; it does not indicate the water flow a specific WR holder can extract. As pointed out, the allowed extraction is defined as a water flow up to a cap. There is not limit to the cap defined in each WR. Thus, the maximum water flow of each WR is variable.

  8. Given that a WR entitles the user to extract the specified water flow, a transaction of 0.001 WR represents a transaction of 0.001 of the specified water flow.

  9. UF (unidad de fomento) is an official, inflation-adjusted unit. As of July 22, 2013, 1 UF = US$ 45.9

  10. Since the water flows defined in each WR are variable, prices/WR are variable and depend on the defined water flows. The higher the water flows, the higher the WR price.

  11. The main regulatory measure established in the WC 1981 to control for potential negative effects on third parties and/or the environment due to the transfer of WR between water users is when the transfer implies a change of water intake location, the transfer must be authorized by the DGA.

  12. Water demand functions have traditionally used linear, log–log or log–linear functional forms Wheeler et al. 2008. A variety of models was tested and the linear functional form is presented here. We lacked basis to sustain a specific functional form and thus chose to present the linear model. It is important to point out that the conclusions do not depend on the functional form.

  13. Given that WR allow WR holders to extract a water flow up to a defined maximum, but a proportion of water flows when there is not sufficient water flows to satisfy all permanent consumptive WR, actual demand and supply of WR depend on actual water flows. Actual water flows is the best information WR buyers and sellers have when trading since historic hydrologic information is not readily available (personal communication Fuentes, Jose, Asociación Canalistas del Maipo). An interested party must petition the DGA for hydrologic information. The answer time of the DGA is variable.

  14. Table 1 presents a list of variables used in the econometric models and their definitions.

  15. The data identifies each buyer and seller for each transaction. Thus, if a specific buyer or seller participated in a transaction on a previous date, we consider that this agent has previous experience in the WR market.

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Authors and Affiliations

  1. Departamento de Economía Agraria, Facultad de Agronomía e Ingeniería Forestal, Pontificia Universidad Católica de Chile, Casilla 306-22, Santiago, Chile

    G. Donoso, O. Melo & C. Jordán

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  1. G. Donoso
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  2. O. Melo
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  3. C. Jordán
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Correspondence to G. Donoso.

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Donoso, G., Melo, O. & Jordán, C. Estimating Water Rights Demand and Supply: Are Non-market Factors Important?. Water Resour Manage 28, 4201–4218 (2014). https://doi.org/10.1007/s11269-014-0739-3

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