An Illiquid Market in the Desert: The Role of Interest Groups in Shaping Environmental RegulationNBER Working Paper (2016)
We present a lobby model to explain the adoption and persistence of seemingly costly environmental policies relative to the likely benefits generated. The arguments of the model are illustrated by water trade restrictions for mining firms in the Atacama Desert of northern Chile. Due to regulation of access to local water in the region, firms have begun using desalinated water at a cost of up to $19,542 per m3/day while agricultural water trades at median price of $343 per m3/day. We explore how governmental maintenance of environmental and indigenous water supplies through restrictions on water trades causes these large price differentials. We provide a simple framework that explains how this policy can be supported under reasonable assumptions about lobbying. Difference-in-difference modeling of sector prices indicates that after an abrupt increase in regulatory denials, prices diverged in a manner consistent with the lobbying model. Policy costs are estimated at $6.15 billion.
Publication DateJanuary, 2016
Citation InformationEric C. Edwards, Oscar Cristi, Gonzalo Edwards and Gary D. Libecap. "An Illiquid Market in the Desert: The Role of Interest Groups in Shaping Environmental Regulation" NBER Working Paper (2016)
Available at: http://works.bepress.com/eric_edwards/14/