Estimating production functions to determine the marginal economic value and price elasticity of water in the Chilean industrial sector

Abstract

This study determines the marginal economic value of water and the price elasticity of demand for this resource using data from the 2018 Annual National Industrial Survey. Specifically, a translog production function is estimated with the ordinary least squares (OLS), constrained least squares (CLS), and instrumental variables (IV) methods, CLS being the method with the best results. Based on the estimates of the production function at the national level, it is determined that, on average, the marginal value of water is 14.6 USD/m3. Finally, the price elasticity of water demand varies between −0.8 and −1.2 depending on the industrial subsector.