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.

Additional Metadata
Keywords Data envelopment analysis, Environmental economic inefficiency, Pollution-generating technologies, Technical and allocative efficiency measurement, US agriculture
JEL Production and Organizations: General (jel D20), Production; Capital and Total Factor Productivity; Capacity (jel D24), U.S.; Canada: 1913 (jel N52), Environmental Economics: General (jel Q50)
Persistent URL dx.doi.org/10.1016/j.reseneeco.2020.101185, hdl.handle.net/1765/128662
Journal Resource and Energy Economics
Citation
Aparicio, J, Kapelko, M, & Zofio Prieto, J.L. (2020). The measurement of environmental economic inefficiency with pollution-generating technologies. Resource and Energy Economics, 62. doi:10.1016/j.reseneeco.2020.101185