The external costs and the optimum use of nitrogen fertilizer based on the balance of economic and ecological benefits was studied with the paddy field system of Dongting Lake area, one of the main food production regions in China. The environmental impact was economically evaluated using methods of the environmental impact economical evaluation. The optimum use of nitrogen fertilizer was calculated based on the exterior diseconomy theory and by using the production function model. Both ecological benefits and farmers’ economic benefits were considered. It was calculated on the data from 2002 that the losses caused by inappropriate utilization of nitrogen fertilizer in the process of food production were fishery, 0.1 × 107 RMB yuan; water treatment, 1.02 × 108 RMB yuan; tour business, 0.11 × 108 RMB yuan, and habitation environment, 0.3 × 107 RMB yuan, totally equivalent to 0.41 RMB yuan kg-1 N. The economically satisfactory and the ecological agronomic nitrogen fertilizer dose for current production was 138 and 137 kg ha-1, respectively. The research showed that the actual nitrogen fertilizer application amount in the paddy field system of the Dongting Lake area already reached or exceeded the farmers’ economic satisfaction and the ecological agronomic nitrogen fertilizer dose for current production. An environmental tax is suggested to impose on over-use of nitrogen fertilizer. The external costs and the optimum use of nitrogen fertilizer based on the balance of economic and ecological benefits was studied with the paddy field system of Dongting Lake area, one of the main food production regions in China. The environmental impact was economically evaluated using methods of the optimum use of nitrogen fertilizer was calculated based on the exterior diseconomy theory and by using the production function model. Both ecological benefits and farmers’ economic benefits were considered. It was calculated on the data from 2002 that the losses caused by inappropriate utilization of nitrogen fertilizer in the process of food production were fishery, 0.1 × 107 RMB yuan; water treatment, 1.02 × 108 RMB yuan; tour business, 0.11 × 108 RMB yuan, and habitation environment, 0.3 × 107 RMB yuan, totally equivalent to 0.41 RMB yuan kg-1 N. The economically satisfactory and the ecological agronomic nitrogen fertilizer dose f or current production was 138 and 137 kg ha-1, respectively. The research showed that the actual nitrogen fertilizer application amount in the paddy field system of the Dongting Lake area already reached or exceeded the farmers’ economic and the ecological agronomic nitrogen fertilizer dose for current production. An environmental tax is suggested to impose on over-use of nitrogen fertilizer.