The Market for Water Rights in Chile: Major Issues

Many economists advocate the use of tradable water rights as the most efficient system for allocating scarce water resources among alternative economic uses. According to this view, a private market in tradable water rights would maximize the economic value of the resource; would help to reduce costly public infrastructure investment and would foster private investment in irrigation. The case of Chile, which in 1981 established a system of tradable water rights, is fairly unique and provides important lessons for other LCDs. The paper reviews the major issues and controversies that have surrounded the practical implementation of this system in Chile. The paper contends that the system in Chile has worked reasonably well although some amendments may be needed. Among other things, a more precise definition of non-consumptive rights is called for and transaction costs arising from incomplete legalization of water titles, lack of infrastructure, and free rider problems need to be reduced. However, all in all, fine tuning of the system, rather than drastic reform, seems the most advisable policy recommendation. In this sense, the conclusions of the paper differ from some policy prescriptions recently proposed by the government. Finally, the papers emphasizes some particular characteristics of the Chilean experience that have contributed to an adequate functioning of the system and that should be taken into account when implementing similar schemes in other