• Environmental and Resource Economics Review
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• v.33 no.2
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• pp.159-178
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• 2024

This study aims to assess the direct and indirect impacts of local fiscal expenditures on water quality. Panel data spanning from 2010 to 2018 for 173 cities and districts in Korea are assembled, and a two-stage dynamic panel model is utilized for our estimation. The empirical findings reveal several key insights. Firstly, local fiscal expenditures on water quality are effective in ameliorating both Biological Oxygen Demand (BOD) and Total Phosphorus (T-P). Notably, the direct impact on T-P surpasses that on BOD in the short and long run. Secondly, expenditures dedicated to water quality improvement demonstrate a positive effect on local economic growth, and an inverted U-shaped relationship is observed between BOD and local economic growth. Due to the positive linkage, the indirect effect on BOD suggests, on average, a deterioration in water quality during local economic growth. Thirdly, concerning BOD, the direct effect of government expenditure on water quality improvement outweighs the indirect effect, but in the case of T-P, the indirect effect is not significant, and the total effect is solely determined by the direct impact. Despite local fiscal expenditures potentially exacerbating water quality through regional economic growth, the study finds that the direct enhancement of water quality remains a more substantial factor in the short and long run.