Returns to Scale, Damages to Scale, Marginal Rate of Transformation and Rate of Substitution in DEA Environmental Assessment

Abstract

This study discusses a new use of DEA (Data Envelopment Analysis) environmental assessment to measure MRT (Marginal Rate of Transformation) and RS (Rate of Substitution) between desirable and undesirable outputs. To discuss MRT and RS, this study first examines a concept of disposability from the perspective of corporate strategies to adapt a regulation change on undesirable outputs. The concept of disposability is separated into natural and managerial disposability. Then, this study explores the computational framework of RTS (Returns to Scale) and DTS (Damages to Scale). The type of RTS is measured within the natural disposability, while the type of DTS is measured within the managerial disposability. Considering the two types of disposability, this study discusses MRT and RS between desirable and undesirable outputs. As an illustrative example, this study applies the proposed approach to evaluate the performance of US coal-fired power plants. This study finds that the regulation policy on NOx and SO2 has been effective on their emission controls under US Clean Air Act (CAA). The regulation on CO2, or a major source of the global warming and climate change, is still insufficient in the United States. Therefore, this study recommends that US federal and local governments should regulate the amount of CO2 emission under the CAA.