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This study examines the upper basin of the Citarum River in West Java, Indonesia, to analyze the optimal environmental policy and issues affecting the balance between economic activities and water environment conservation, for example, controlling water quality while maximizing economic activities in the region. The quantitative results derived using model simulation analysis clarifies the study’s issues. An integrated model linking two sub-models describing socio-economic activities and the dynamics of water pollutants was simulated. The model incorporates government subsidies for sewerage system maintenance and septic tank installation as economic policy variables for water quality control. Further, the optimal amount of these subsidies and changes in local economic activities according to water pollution load constraints are derived in a time-series structure for each region from 2015 to 2030. The gross regional product (GRP) maximization problem is solved under the inflow constraints of total nitrogen, total phosphorus, and chemical oxygen demand into the river. The results showed that the most favorable balance between water environment conservation and local economic activities can be achieved by setting the inflow constraint for 2030 at +3% of the 2015 level and the maximum annual cost of the measures at 10 times the current environmental budget of the West Java Province.

Improving Water Quality in the Citarum River through Economic Policy Approaches