Joint pollution control in the Lake Tai Basin and the stabilities of the cost allocation schemes

This paper provides insights into the allocation of benefits derived from joint wastewater treatment in the Lake Tai Basin of China and the acceptability and stability of different cost allocation schemes in a trans-jurisdictional water system context. First, the wastewater treatment cost function is estimated and coalition costs are compared to the cost of stand-alone wastewater treatment in each province. Second, two standard and five game theoretical cost allocation schemes are applied to the grand coalition. Results suggest that a cost savings of US $46.46 million can be obtained by forming a grand coalition. All allocation schemes were found to be acceptable. Results also suggest that both Shanghai and Jiangsu Province would prefer a proportional allocation scheme based on pollutant discharge, because it would offer them the largest cost savings. But this allocation scheme is the least stable one. Based on the criterion of stability, the Nash-Harsanyi scheme emerges as providing the optimal allocation. Finally, calculation of power and stability indexes suggests Jiangsu Province as an agent is critical to the success of grand coalition formation.