An upstream-downstream externality related to water quality: The case of the Porong River in Indonesia

Abstract In this paper, we discuss an upstream-downstream externality related to water quality (the level of ammonia) in a river by distinguishing between a non-cooperative and cooperative case. As empirical case, we use the Porong River, which is located in the East Java province of Indonesia. In this river, aquaculture farmers are located downstream while the industrial firms are placed upstream. In both the non-cooperative and cooperative case, we find that the optimal profit by a polyculture is higher than the optimal profit for an industrial firm, and this result is robust to variations in relevant parameter values. Furthermore, by comparing the non-cooperative and cooperative cases, we find that the optimal gain of moving to joint management is reasonably high, and when varying relevant parameter values, this gain remains almost unchanged.