How Much Does Water Management Cost? The Case of the Water Market in the Ñuble River of South-Central Chile

Abstract

Economic and population growth has increased the demand for freshwater worldwide, generating pressure on the environment and creating conflicts among users. Water markets have emerged as a solution for managing this resource, and Chile has been a pioneer in implementing this approach. However, most Chilean water markets are inefficient due to incomplete information, the poor flexibility of the water distribution system, and high transaction costs. This study analyzes the Ñuble River water market and estimates the economic and social costs of its inefficiencies through a methodology based on the marginal profitability of water, which simulates the operation of a perfect market for the Ñuble River irrigation system. Net benefit losses from market inefficiencies were estimated at 7.6 million dollars annually, which is equivalent to a 25% increase in the net returns of the current river water distribution strategy. Losses of economic benefits are even greater as the availability of water flow decreases. This is important considering that in the last decade the water flows of the Ñuble River have decreased by more than 30% compared to their historical average.