Abstract
This study introduces the measurement of environmental inefficiency from an economic perspective. We develop our proposal using the latest by-production models that consider two separate and parallel technologies: a standard technology generating good outputs, and a polluting technology for the by-production of bad outputs. While research into environmental inefficiency incorporating undesirable or bad outputs from a technological perspective is well established, no significant attempts have been made to extend it to the economic sphere. Based on the definition of net profits, we develop an economic inefficiency measure that accounts for suboptimal behavior in the form of foregone private revenue and environmental cost excess. We show that economic inefficiency can be consistently decomposed according to technical and allocative criteria, considering the two separate technologies and market prices, respectively. We illustrate the empirical implementation of our approach using a dataset on agriculture at the level of US states.
Highlights
Measuring the environmental inefficiency of production units is an increasingly important topic of recent economic research
The environmental economic efficiency model that we proposed in the vein of Farrell (1957) extends the existing technological models for environmental efficiency measurement to account for these economic dimensions by postulating an objective function that aims at maximizing private revenue net of the environmental damage
The details on the method of construction of all variables are contained in the following webpage of the USDA-ERS: https://www.ers.usda.gov/ data-products/agricultural-productivity-in-the-us/methods/. Since these data are given in overall terms for the whole country, we further disaggregate it by state, using for that purpose the share that each state has in farm production expenses for gasoline, fuels, and oils, as reported by the U.S Department of Agriculture, expressed in thousands of dollars
Summary
Measuring the environmental inefficiency of production units is an increasingly important topic of recent economic research. Regardless the modeling approach—parametric or non-parametric—under the four listed categories, a common feature of all previous studies is that they are only capable of measuring technical efficiency by focusing on the technological side of the production process, thereby neglecting the measurement of environmental efficiency from an economic perspective This allows us to summarize what our model does; i.e., enhancing the existing approaches through the introduction of a measure of environmental economic inefficiency that, grounded on the theoretical framework proposed by Farrell (1957), considers both good and bad outputs, and enables its decomposition into technical and allocative components.
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