A STUDY ON ECONOMIC EVALUATION OF BENEFICIARY PAYS PRINCIPLE IN WATER RESOURCE MANAGEMENT: THE CASE OF NAMYANGJU IN KOREA By Jaehyun Yoon THESIS Submitted to KDI School of Public Policy and Management in partial fulfillment of the requirements for the degree of MASTER OF DEVELOPMENT POLICY 2014 A STUDY ON ECONOMIC EVALUATION OF BENEFICIARY PAYS PRINCIPLE IN WATER RESOURCE MANAGEMENT: THE CASE OF NAMYANGJU IN KOREA By Jaehyun Yoon THESIS Submitted to KDI School of Public Policy and Management in partial fulfillment of the requirements for the degree of MASTER OF DEVELOPMENT POLICY 2014 Professor Tae Yong Jung ABSTRACT A STUDY ON ECONOMIC EVALUATION OF BENEFICIARY PAYS PRINCIPLE IN WATER RESOURCE MANAGEMENT: THE CASE OF NAMYANGJU IN KOREA By Jaehyun Yoon Using hedonic price method, this study analyzes the impact of restriction for water quality protection on property value with officially announced prices of reference land in the city of Namyangju in 2012. The analysis results show that there is statistically significant evidence that supports the land price difference between the restricted area and the unrestricted area of Namyangju caused by the restriction for water quality protection. In specific, under the semi- log model, the loss rate that the restricted area experience is 15.0% of the land price of the unrestricted area. Under the double-log model, the rate is estimated to be 19.8%. Based on the results from the regression analyses of the models, the total compensations for the city of Namyangju are estimated to be in the range between 6.5 and 8.6 trillion won. Under the perpetuity compensation scheme at the discount rate of 10 %, the estimated annual compensation is in the range between 0.7 and 0.9 trillion won. This is more than Water Use Fee collected in 2012 for the Han River, which is approximately 0.5 trillion won. Considering the size of the restricted area of the Paldang area, which is more than 18 times of that of Namyangju, the rate of Water Use Fee, which is based on beneficiary pays principle and imposed on the residents of the downstream area, needs to be increased to sufficiently compensate the economic loss caused to the upstream areas of the Han River. i Copyright by Jaehyun Yoon 2014 ii ACKNOWLEDGEMENT I first would like to express special gratitude to my thesis supervisor, Professor Tae Yong JUNG. His guidance and advices allowed me to build a sense of academic research and practicality. In addition, both his compliments and criticism stimulated me to navigate through touch challenges and ultimately find the finish line of this thesis. I also would like to sincerely thank my second thesis supervisor, Professor Taejong KIM. Through his lectures and comments, I was able to gain confidence in econometric analysis and to complete the quantitative analyses of this thesis. I also would like to express my appreciation to Professor Insoo JEONG for the evaluation comments on the thesis and Professor Jaejin BYUN for his advices, which helped me design the structure of this thesis at the initial stage. I cannot fail to thank Mr. Han Gook KIM and Ms. Sun Young HWANG of BIZ-GIS. Through the generous support program of BIZ-GIS, they provided me technical assistance regarding the data collection and allowed me to take advantage of GIS technology. Without the assistance of BIZ-GIS, I would not have been able to conduct the analyses for this thesis. I also would like to thank Mr. Chanil JUNG of KDI School for his assistance at the early stage regarding data mining, which allowed me to continue the research of this thesis. Lastly and most importantly, I would like to thank my family for their support and encouragement. iii TABLE OF CONTENTS Abstract ...................................................................................................................................... i Acknowledgement ................................................................................................................... iii List of Tables .............................................................................................................................. v List of Figures .......................................................................................................................... vii 1. Introduction .......................................................................................................................... 1 2. Background Information and Literature Review ............................................................. 3 2.1. Beneficiary Pays Principle ........................................................................................... 3 2.2. Water Use Fee for the Han River in Korea .................................................................. 4 2.3. Officially Announced Price of Reference Land ........................................................... 9 2.4. The Paldang Area and the City of Namyangju ............................................................ 9 2.5. Development Restriction for Water Quality in the Paldang Area .............................. 12 2.6. Hedonic Price Method ............................................................................................... 16 3. Research Method and Data Analysis ................................................................................ 18 3.1. Research Method ....................................................................................................... 18 3.2. Data Analysis ........................................................................................................... 22 3.2.1. Descriptive Analysis ........................................................................................ 22 3.2.2. Regression Analysis ......................................................................................... 27 3.2.3. Border Analysis ............................................................................................... 32 3.3. Limitations ................................................................................................................. 39 4. Conclusion and Implications ............................................................................................. 40 Reference ................................................................................................................................ 44 Appendix A. Results of Robust Regression .......................................................................... 47 Appendix B. Results of Quantile Regression ....................................................................... 49 iv LIST OF TABLES Table 2-1 Areas required to pay Water Use Fee in the region of the Han River ........................ 5 Table 2-2 Recipient areas of Han River Watershed Management Fund .................................... 5 Table 2-3 Water Use Fee for the region of the Han River ....................................................... 8 Table 2-4 Total Water Use Fee collected in the region of Han River ...................................... 8 Table 2-5 Land composition of Namyangju .......................................................................... 11 Table 2-6 Development restriction for water quality protection in the Paldang area (Water Supply Source Protection Area and Water Source Special Policy Area) ................ 12 Table 2-7 Development restriction for water quality protection in the Paldang area (Water- pollutant Buffering Zone) ........................................................................................ 14 Table 2-8 Development restriction for water quality protection in the Paldang area (Nature Protection Area) ....................................................................................................... 15 Table 2-9 Summary of the literature review on hedonic price method .................................... 17 Table 3-1 Hedonic price models used ...................................................................................... 19 Table 3-2 Definitions of the variables used ............................................................................. 19 Table 3-3 Number of the sample observations used ................................................................ 23 Table 3-4 Sample area and actual area of Namyangju ............................................................. 23 Table 3-5 Descriptive statistics of the sample data used (excluding dummy variables) ......... 23 Table 3-6 Descriptive statistics of the sample data used (dummy variables) .......................... 24 Table 3-7 Descriptive statistics of the sample data used sorted by restriction (excluding dummy variables) .................................................................................................... 25 Table 3-8 Descriptive statistics of the sample data used sorted by restriction (dummy variables) ................................................................................................................. 26 Table 3-9 Area-weighted average land price of the samples used ........................................... 27 Table 3-10 Regression results for Namyangju (semi-log model) ............................................ 28 Table 3-11 Regression results for Namyangju (double-log model) ......................................... 29 v Table 3-12 Loss rates for the restricted area of Namyangju .................................................... 30 Table 3-13 Estimated total compensation for water quality protection in Namyangju ........... 31 Table 3-14 Estimated perpetuity compensation for water quality