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Estimating The Value Of Water In The Chilean Industry: A Marginal Productivity Approach

Congress: 2015
Author(s): leonardo vargas ovando, Felipe vasquez lavin, Roberto Ponce Oliva

1, Universidad del Desarrollo2

Keyword(s): Sub-theme 14: Valuing water: monetary and non-monetary dimensions,

Water use in the manufacturer industry has many purposes including cooling, transportation, dilution or as part of the final product, showing a significant relevance to the existence of any economic activity. Nevertheless, waterÂs total economic value is not completely understood avoiding an efficient allocation of water resources among economic activities. For instance, at a basin scale, an efficient management of watersheds requires knowing and contrasting the value of water among different uses including forestry, agriculture, residential and industrial. This is especially relevant in contexts of social and environmental conflicts related to water ownerships that confront industrial uses again subsistence water consumption and/or agriculture, especially for food safety. Any economic analysis requires understanding the (marginal) value of water in order to allocate it efficiently. In this paper we estimate the economic value of water in the Chilean manufacture industry estimating the water marginal productivity for different functional forms for the production function. We regress water consumptions against several explanatory variables representing inputs in a production function including capital, labor, energy and intermediate inputs (KLEM) and several proxy variables for technological change, geography, time and productive sector. Our sample contains a panel of 88,795 observations of Chilean firms from 1995 to 2012. We used two functional forms for the production function; a Cobb-Douglas and a Trans-Log functional form. The translog utility function, given its flexibility, fits the data better than the Cobb Douglas functional form. Production elasticity of water in the Chilean industry and the marginal value for industrial water were 0,0059 and 796 [CLP/m3] (1,69 [USD/m3]), respectively. Looking at a desegregated level we found that the elasticity and marginal value of water varies from 0,0015 and 205 [CLP/m3] (0,44 [USD/m3]) for the "electronic equipment, communication and precision" sector or 0.0524 and 7,025 [CLP/m3] (14,96 [USD/m3]) for the "furniture and other manufacture" sector to negative values of -0,0457 and -6.133 [CLP/m3] (13,06 [USD/m3]) for the "transportation" sector and -0,0021 and -279 [CLP/m3] (0,60 [USD/m3]) for the "metallic, machinery and equipment" sector. These differences in the shadow prices represent different water uses, intensity in water uses, technological efficiency, water quality and prices faced by the industry. We found that water and capital are substitutes in the production function (cross elasticity of 0.0036), this is consistent with the idea that water is a support for the industrial process and investment in more technology produces a reduction in water consumption. Similarly we found that overall water is a substitute of energy (elasticity water-energy of 0.0168), but it varies considerably by economic sector. Regarding the relationship between water and labor and water and intermediate inputs we found that complementarity (elasticity wate labor and water -inputs of -0.0099 and -0.0143, respectively). Our results by economic sector regarding both elasticity and marginal value of the production were consistent with other studies form the last decade in different countries (Brazil, China, Korea, Kenya), nevertheless they differed from studies from the 70's in industrialized countries (e.g. Canada, EE.UU., England). Our aggregate results are also consistent with previous studies suggesting that price mechanism may be useful as an instrument to manage water use at industrial level.

2011 IWRA - International Water Resources Association - - Admin