Economics Today 18th Edition by Roger LeRoy Miller

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China Confronts Contaminated Water
Guifan Sun, a dean at the China Medical University, is deeply concerned. A study he has conducted with several other researchers has concluded that almost 20 million people in China inhabit areas with arsenic water contamination that exceeds the World Health Organization's recommended limit. Of these people, as many as 6 million may be exposed to arsenic levels more than five times this limit. For these people, Sun argues, there is "urgency" for government action to address water-contamination problems-which extend beyond arsenic to ammonia, heavy metals, and other pollutants harmful to human beings. Water pollution also is damaging people's property, including farmlands and fisheries.
Sun and his colleagues have convinced the Chinese government's Ministry of Land and Resources to conduct follow-up studies. In the meantime the nation's State Council, or ruling cabinet, is considering implementing a tougher set of antipollution measures. The initially drafted rules include financial punishments for polluters and tighter regulatory limits on pollution to be imposed on companies that create water pollution as a by-product of their production processes.
What guidance does the economic theory of the correction of externalities offer regarding the amounts of financial penalties to be imposed on polluters?