An Illiquid Market in the Desert: The Role of Interest Groups in Shaping Environmental Regulation

Eric C. Edwards, Oscar Cristi, Gonzalo Edwards, Gary D. Libecap

NBER Working Paper No. 21869
Issued in January 2016
NBER Program(s):   DAE   EEE

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. The area is one of the driest in the world but also the world’s top copper producer. 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 type of policy can be supported under reasonable assumptions about lobbying. Interest group lobbying, limited information to unorganized general citizens about policy costs and benefits, and their associated distribution can lead to strong regulation, even when the protected environmental areas and agricultural populations are small and isolated. 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. Using market price and desalination cost data, policy costs are estimated at $6.15 billion dollars or approximately $350 per citizen, which may or may not equate to perceived general benefits.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21869

Users who downloaded this paper also downloaded* these:
de Ree, Muralidharan, Pradhan, and Rogers w21806 Double for Nothing? Experimental Evidence on the Impact of an Unconditional Teacher Salary Increase on Student Performance in Indonesia
Libecap w21903 Coasean Bargaining to Address Environmental Externalities
Graff Zivin, Neidell, and Schlenker w16695 Water Quality Violations and Avoidance Behavior: Evidence from Bottled Water Consumption
Jaffe and de Rassenfosse w21868 Patent Citation Data in Social Science Research: Overview and Best Practices
Schmalensee and Stavins w21742 Lessons Learned from Three Decades of Experience with Cap-and-Trade
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us