Both rice production and fish culture in the Mekong Delta, Vietnam have a close mutual relationship with the use of water and land resources. First, they are competitive in the use of land and water. Second, rice production discharges pesticides into water bodies causing an external cost to fish culture, which, in turn, leads to an increase in fish cost and price. A dynamic model for maximizing the social surplus is developed for optimal management of resources as well as production. Its first-order conditions provide some important quantitative as well as qualitative interpretation that explains the dynamic relationships among prices, water quality, and shadow price. The time paths and phase diagrams of the model show the variations and the changes in prices, outputs, and water quality over time, and the initial position in regions leading to divergence or convergence. As a result, effective policies are set up to maximize social welfare. Data are collected and used in estimations of demand functions of rice and fish, the function of assimilative capacity, the fish cost function, and the parameter of pesticide discharge. The total loss of fish culture (total external cost in the year 2001) due to pesticide use is about $US 9 billion. Two cases of linear and nonlinear forms are simulated with scenarios of initial values for the year 2001. The simulation shows optimistic results with prices going down and water quality going up over time, meaning the social surplus will rise. The phase diagram shows that the social manager should look for policies to raise the initial value of water quality to get an optimal solution. A comparative analysis of the model simulation shows the directions of change in parameters leading to a change in the steady state values. How to change the parameter values is analyzed and the analysis suggests different policies such as a minimum tax on pesticide input about 123%, change in priority in industry development that aquaculture must be considerable, expansion of fish/rice or shrimp/rice pattern, changes in pesticide regulations, training and transfer of technology to the farmer how to raise fish efficiently, and policies for aquacultural development.
