Are water tariffs sufficient incentives to reduce water leakages? An empirical approach for Chile

Abstract

Given a changing and uncertain future climate with increasedwater scarcity, one of the main challenges of water companies is to reduce leakage in the water distribution system. To deal withthis challenge, water regulators should introduce efficient economic incentives. In this study, shadow prices of water leakage for 23 Chilean water companies over the period 2007–2015 were computed by estimating a translog input distance function using stochastic frontier techniques. The results indicate that the average shadow price of water leakage is 0.441€/m3, which means that on average the cost of losing one cubic metre from the water distribution system is 0.441€. Moreover, a comparison of the volumetric water tariffs and the shadow prices of water leakage evidenced that most water companies have economic incentives to reduce water losses, but they do not. Hence, the water regulator should introduce direct penalties to achieve water leakage targets. The findings of our study are of great importance for policy makers to define incentives to water companies to achieve environmental targets and more efficiently manage water resources.