Abstract
This paper attempts to explore how the Taiwan government can effectively use subsidies to retire aquacultural farms based on the externality ground subsidence from pumping groundwater, using the town of Budai in Chia-Yi county as an example. The research first constructs the relationship between ground subsidence and groundwater consumption after taking the externality into consideration. An economic model that minimizes the total subsidy expenditure is then used for targeting the fish farms that need to be retired first in order to meet environmental goals. The results show that when the interaction caused by pumping groundwater among neighborhood farmers is considered, the responsibility for achieving the targets of environmental control is not evenly shared by aquacultural farmers. The location, and not the farm size, plays a more important role in determining whether environmental goals can be met. © 2008 Cambridge University Press.