Economics of social trade-off: Balancing wastewater treatment cost and ecosystem damage

We have developed a social optimization model that integrates the financial and ecological costs associated with wastewater treatment and ecosystem damage. The social optimal abatement level of water pollution is determined by finding the trade-off between the cost of pollution control and its resulting ecosystem damage. The model is applied to data from the Lake Taihu region in China to demonstrate this trade-off. 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 accuracy of the economic valuation.