where πn and πp are the rice profits in the non-polluted and polluted areas. Because ΔP×ΔQ issmall compared with the other parts of the equation, it can be ignored and assumed to be 0.However, it is complicated to estimate quality loss through the proxy of price because thereare many other unobservable factors, excepting water pollution, which affect the price of rice.Thus, the study only calculates the three elements affected by water pollution:• Quantity loss: Water pollution causes a decrease in rice yield. The production functionapproach is used to estimate the loss of rice yield.• Cost increase: Since farms may aim and indeed be able to compensate for the possibleproductivity losses by implementing activities which are capable of offsetting this possibleloss but are more costly to implement. In such circumstances, because it is not productivitywhich will be impacted, but production costs, cost function approach is applied to assessthe impacts of pollution in economic terms.• Profit loss: This is defined as total loss of net economic return estimated by the comparisonof profit functions between two selected areas (one is considered as the polluted, other isthe non-polluted area). The difference in rice profits of two regions is considered as totalloss of net economic return due to industrial pollution.
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