Water demand in the Chilean manufacturing industry: Analysis of the economic value of water and demand elasticities

Abstract

In this article, we estimate both the economic value of water and own-price and cross-price elasticities of water for the Chilean manufacturing industry using the production function approach. Estimating the production function allows us to estimate the marginal productivity of water which corresponds to its economic value. Our estimations are based on panel data obtained from the National Industrial Survey for the period 1995–2014, accounting for more than 10,000 industrial plants. We use a translog specification for the production function, considering water, capital, labor, energy, and intermediate material as explanatory variables. We find substitution patterns among most inputs, except for energy and water, which are found to be complements. Our results suggest that the manufacturing sector is characterized by an elastic water demand, with an average economic value of water of 8.071 [USD/m³]. Based on our findings, there is room to increase water prices in most sectors without affecting the competitiveness of firms. Knowing the economic value of water and its price elasticity could help policymakers to design water policies that promote more efficient use of this scarce resource.