On modelling pollution-generating technologies
Russell, R. Robert
Levkoff, Steven B.
Journal of Environmental Economics & Management
We argue analytically that many commonly used models of pollution-generating technologies, which treat pollution as a freely disposable input or as a weakly disposable and null-joint output, may generate unacceptable implications for the trade-offs among inputs, outputs, and pollution. We show that the correct trade-offs in production are best captured if a pollution-generating technology is modeled as an intersection of an intended-production technology of the firm and nature's residual-generation set. The former satisfies standard disposability properties, while the latter violates free (strong) disposability of pollution and pollution-causing inputs. As a result, the intersection—which we call a by-production technology—violates standard free disposability of pollution and pollution-causing inputs. Employing data envelopment analysis on an electric-power-plant database, we illustrate shortcomings, under by-production, of two popular efficiency indexes: the hyperbolic and directional-distance-function indexes. We propose and implement an alternative index with superior properties. Under by-production, most efficiency indexes decompose very naturally into intended-production and environmental efficiency indexes. This decomposition is difficult to find under alternative specifications of pollution-generating technologies.
“NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Environmental Economics and Management . Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Environmental Economics and Management Volume 64, Issue 1, July 2012, Pages 117–135; available online at http://www.sciencedirect.com/
Volume 64, Issue 1, July 2012, Pages 117–135