Water markets as a mechanism for intersectoral water transfers: the Elqui Basin in Chile

The Elqui River in north-central Chile provides water for a medium-sized urban area and a small but thriving irrigated agriculture sector. A number of factors combined to provide incentive for the municipal water company servicing the coastal urban area to purchase water-use rights from irrigators in the early 1990s. This transfer was a well-recorded example of Chilean water markets functioning as proponents had expected. And despite the elapsed time, and Chile’s favorable system of transferable water-use rights, these trades remain among the very few recorded cases of intersectoral trading in the country. By purchasing water rights this water supply company was able to reduce its cost of raw water provision. Economic analysis of this transfer showed relatively modest economic gains from trade. Although, the value of water in municipal water supply is high, the value of water to profitable farmers is also high. The construction of the Puclaro Dam on the Elqui River demonstrates that the intersectoral water transfer that occurred in the early 1990s will not be the ultimate solution to the urban water supply needs of this urban area.