Centralized versus Decentralized Cleanup of River Water Pollution : An Application to the Ganges

We exploit the public good attributes of Ganges water pollution cleanup and theoretically analyze an aggregate economy of two cities---Kanpur and Varanasi---through which the Ganges flows. Our specific objective is to study whether water pollution cleanup in these two cities ought to be provided in a centralized or in a decentralized manner. We first determine the efficient cleanup amounts that maximize the aggregate surplus from making the Ganges cleaner in the two cities. Second, we compute the optimal amount of water pollution cleanup in the two cities in a decentralized regime in which spending on cleanup is financed by a uniform tax on the city residents. Third, we ascertain the optimal amount of water pollution cleanup in the two cities in a centralized regime subject to equal provision of cleanup and cost sharing. Fourth, we show that if the two cities have the same preference for pollution cleanup then centralization is preferable to decentralization as long as there is a spillover from pollution cleanup. Finally, we show that if the two cities have dissimilar preferences for pollution cleanup then centralization is preferable to decentralization as long as the spillover exceeds a certain threshold