A policy based on the Polluter Pays Principle (PPP) with respect to the subject of contamination by nitrogen fertilizer is proposed. The mechanism is tested via a cost-efficient input tax policy to supply clean drinking water that is subject to contamination by nitrogen fertilizer and to quantify the welfare change due to public control. The paper proposes, for different water scarcity conditions, a policy that supports the legal principle of the PPP, by compensating the victim for the residual pollution not abated by the cost efficient solution, without any effects on the efficiency criterion. By introducing a Welfare Change Index (WCI) which measures the significance of an authority's intervention in dealing with externalities, we suggest that for relatively high and moderate water scarcity conditions, welfare change supports public intervention. However, for low scarcity conditions, welfare change is low, which discourages public intervention.

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