Institutional constraints on water and water rights trades are usually implemented to reduce the potential costs of free trade in water rights, but these constrains are themselves not without cost. Using data on permanent water rights and annual spot water transactions in the Limarí River Valley of northern Chile, we test for trade barrier‐induced price differences in the constrained permanent water rights market versus the unconstrained spot water market and then estimate the welfare losses generated as a result of these restrictions. We find that trade barriers in the permanent water rights market cause prices to diverge across adjacent irrigation districts for homogenous water rights despite the fact that prices equalize across irrigation districts in the unconstrained spot water market. The resulting estimates of welfare losses from these barriers in the permanent water rights market are found to be significant.
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Hadjigeorgalis et al. (2004) studied this question.
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