Economic Value of Water in the Korean Manufacturing Industry

Water is important to manufacturing firms because industrial water is used for a variety of purposes as one of the most important inputs in the production process. This paper estimates the economic value of water in the Korean manufacturing industry by employing the concept of the value of marginal product (VMP). We use data on 53,912 factories surveyed in 2003 and consider two types of production functions: the Cobb‐Douglas and trans‐log functions. The specification test revealed that the trans‐log function was more appropriate for estimating the data. The industry‐wide output elasticity and VMP of industrial water were estimated to be 0.0104 and KRW 1,156 (USD 1.05) per m³, respectively. The estimated VMP ranged from KRW 428 (USD 0.39) per m³ for the precision instrument sector to KRW 13,760 (USD 12.51) per m³ for the transportation equipment sector, indicating that the VMP varies across sectors. The results have important implications for various areas of industrial water management. Any cost‐benefit analysis of new projects providing industrial water requires information on the economic value of industrial water. Moreover, such information is required for determining the ways in which scarce water resources could be distributed to various sectors.