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# **Box 2. What Are Property Rights and Why Are They Important?**

A property right over an asset consists of the right to consume, earn income from or sell the asset. The process of establishing property rights involves enshrining legal ownership. Property rights encompass both physical rights which allow owners to have possession of assets that they own as well as legal rights which allow effective recourse to the legal system if the physical rights are violated. Formal methods of establishing property rights are found in that part of the legal system which determines how property can be defined and exchanged. Normally there needs to be an efficient process for registering property rights which includes ensuring that nobody else has prior claims. Legal enforcement mechanism are important in dealing with rights that may have been violated. However, the strength of ownership is often diluted by constraints arising from the nature of the asset or from the state which might place restrictions upon its use. In addition, if the costs of enforcing rights are high because of inadequate provision of such public goods as policing and the legal system, the strength of property rights will be weakened.

A key concep **t** hat affects the strength of property rights is that of transactions costs, which are the costs of defining, protecting and exchanging property rights. The effects of high transactions cost on property rights and exchange have only recently been recognized fully (see Holden and Rajapatirana 1995). Trades which would increase welfare may not occur if the process of trading is costly or if rights that are traded cannot be protected. Therefore, institutions that lower transactions costs are often necessary to help in the efficient functioning of markets and the market for water is no exception. Once rights are defined and can be traded and transactions costs are low, assets will be employed in the most efficient manner. In this way societal welfare will be maximized.

# _Countries Promoting Tradable Water Rights_

21. To allow water users to secure water on a permanent basis as well as to facilitate water leasing, some countries have begun to pass legislation to permit secure and welldefined tradable water rights. _Chile's_ 1981 Water Code established tradable water rights in order to strengthen property rights, allow flexibility in water use, and empower water users by requiring their consent to any reallocation of water. Under this law, the State grants existing water users (farmers, industrial furms, water and power utilities) property rights to both surface and ground water without charge. New and/or unallocated water rights are auctioned. The water rights are separate from land and their private property status is based on the property laws of the Civil Code. Except for a few restrictions, they can be transferred or sold to anyone for any purpose at freely negotiated prices. As with land, market forces determine the allocation and use of water, once assigned.

22. Water rights are acquired by being recorded in a public registry as either consumptive or non-consumptive, temporary or permanent. Permanent consumptive rights are defined in volumetric terms unless there is insufficient water to satisfy all water rights holders, in which case the water is distributed proportionately. Temporary (contingent)