Opening the “black box” of environmental production technology in a nonparametric analysis

Abstract

Due to rapid economic development, environmental pollution has become an increasingly serious issue for achieving sustainable economic growth. Appropriate measures of environmental efficiency are crucial for policy makers in order to balance economic and social development in line with constructing a more sustainable society. However, existing environmental efficiency measures suffer from shortcomings inherent in each methodology. To overcome these shortcomings, in this paper, a new environmental production technology is first proposed. We then we show that the weak-G disposability model, the by-production model and the natural/managerial disposability model are the environmental efficiency models based on special cases of our proposed environmental production technology. Next, based on the proposed environmental production technology, a new by-production model is developed. We explore its economic implications and clarify its advantages over existing environmental efficiency models. Finally, an empirical analysis of China's thermal power industry is conducted in order to illustrate the advantages and the applicability of our proposed approach.