The rapid development of the aquaculture industry in coastal areas has created high demand for water, threatening the environment and attracting public concern due to its negative effects on the environment. We attempt to design an economic incentive mechanism to encourage fish farms to reduce their externalities of ground water exploitation in a sustainable way through the imposition of an environmental tax. Most of the literature on environmental tax basically focus on the environmental externalities of immediate impacts and neglects the potential impacts of an ecological value loss. We present three models to determine the private optima, social optima, and the gap between private optima and social optima, and analyze the effects of fish price, ground water price, and discount rate on the optimal water consumption. A ground water exploitation rate is employed as a decision variable for the farmer and the policy planner by maximizing private profits and social benefits respectively. In this paper we compare the farmer’s optima and social optima and suggest that two types of an environmental tax must be imposed on the fish farm in order to reduce pollution emissions and improve the ecological values of water storage. The results of our analysis may provide some insight regarding the quantitative relevance between production revenues of fish farms and externalities of ground water exploitation.
