A revenue function-based simulation model to calculate ecological compensation during a water use dispute in Guanting Reservoir Basin

Guanting Reservoir is one of the main sources of water to Beijing, and has had poor water quality since 1997. This has to some extent been due to a water-use dispute between Zhangjiakou (upstream) and Beijing (downstream) in the Guanting Reservoir Basin. Ecological compensation is a powerful economic incentive, and was thus chosen in this study as a model to settle the dispute. We established a model which consisted of revenue functions of Beijing and Zhangjiakou, respectively, to calculate the ecological compensation under various situations. The revenue functions included socio-economic benefits of water, pollution control cost, and environmental externalities in the downstream area. The environmental externalities included both financial and ecological losses when water sharing of the upstream area was outside the initial property distribution. Based on the revenue functions, we calculated the exact payment in a dispute, considering the profit of both the upstream and downstream areas.