Harmonizing model with transfer tax on water pollution across regional boundaries in a China’s lake basin

This paper presents a bilevel programming framework for a harmonizing model with transfer tax (HMTT) on water pollution across regional boundaries of a lake basin in China, where the administrator is the upper‐level decision maker and individual regions consisting of the lake basin are the lower‐level decision makers (followers). Leader’s cost is the total pollution reduction cost, whereas each region selfishly minimizes its own cost including reduction cost and transfer cost, given the transfer tax rate imposed by the leader. The HMTT guarantees that the imposed environmental quality standard is met through the transfer tax. Based on the KKT conditions of an auxiliary problem, we obtain that the solution set of the HMTT is nonempty. An algorithm is proposed, with the convergence result, to compute the cost‐minimized transfer tax rate along with the reduction quantities of individual regions. Theoretical analysis and a case study for China’s Taihu Lake Basin show that the HMTT is superior to the current model of proportional share of pollution reduction (MPSPR). The HMTT not only solves the problem of conflicts over water pollution across regional boundaries but also utilizes the resources of the lake basin more efficiently.