Economics of Social Trade-off: Abatement Level vs. Ecosystem Damage

We have developed a social optimization model that integrates wastewater treatment cost function and ecosystem damage cost function. The social optimal abatement level of water pollution is determined by finding the tradeoff between pollution control cost and ecosystem damage. The model is applied to data from the Lake Taihu region in China to demonstrate this tradeoff. A wastewater treatment cost function is estimated with a sizable sample from China, and an ecological damage cost function is estimated following an ecosystem service valuation framework. Results show that the wastewater treatment cost function has economies of scale in facility capacity, and diseconomies in pollutant removal efficiency. Results also show that a low value of the ecosystem service will lead to serious ecological damage. One important policy implication is that the assimilative capacity of the lake should be enhanced by forbidding over extraction of water from the lake. It is also suggested that more work should be done to improve the economic valuation accuracy.