NATURAL RESOURCE MODELING Volume 22, Number 1, Spring 2009 TREATMENT VERSUS PREVENTION OF NITROGEN FERTILIZER POLLUTION: AN INTER-SECTORAL EXTERNALITY POLICY MODEL YARON FISHMAN * Natural Resources and Environmental Research Center, University of Haifa, Haifa, 31905, Israel E-mail : yfishman@econ.haifa.ac.il NIR BECKER Chair, Department of Economics and Management, Tel-Hai College, Upper Galilee, 12210, Israel E-mail : nbecker@telhai.ac.il MORDECHAI SHECHTER Chair, Department of Environmental and Natural Resources Management, University of Haifa, Haifa, 31905, Israel E-mail : shechter@econ.haifa.ac.il Abstract. This article presents an economic, hydrologi- cal, dynamic optimization model, which describes the negative external effects of nitrogen fertilizers on groundwater quality. The relative merits of treatment versus prevention of nitrogen pollution were analyzed. A dynamical water and nitrogen flow between land surface, the unsaturated zone, and groundwater was employed. A specific treatment technology, which gives rise to a discontinuous cost function, was also used. Applying the model to the coastal aquifer in Israel, our results showed that in a joint (agricultural and domestic) water source area that supplies a relatively small quantity of drinking water, it is more efficient to combine a policy that imposes restrictions on the use of nitrogen with a drinking-water treatment process. However, when a relatively large quantity of drinking water is involved, imposing restrictions on the use of nitrogen only is more efficient. The paper, thus, is useful to planners of fast growing urban population centers with regard to regulation and can be used to calculate and evaluate specific policies. Key Words: Groundwater contamination, nitrate, pol- lution control, pollution prevention. We would like to thank Terry Gensler and the two anonymous referees for their constructive comments. * Corresponding author: Yaron Fishman. Current address of this author: Head of Economics Division, Public Utility Authority-Electricity, P.O. Box 1296 Jerusalem 91012 Israel, E-mail: yaron@pua.gov.il Received by the editors on 30 th June 2007. Accepted 14 th January 2008. Copyright c 2008 Wiley Periodicals, Inc. 137