Accounting for environmental pollution in production function

Abstract

Purpose

Traditionally, economic production models consider pollution as bads that may be modeled as either outputs or inputs in economic models. The purpose of this paper is to examine the implications of these modeling choices on the measurements of productive efficiency and private costs of pollution control.

Design/methodology/approach

The authors apply the hyperbolic distance functions to measure trucking efficiency and the private costs of pollution control.

Findings

The results show: (i) regardless of the choice of modeling, when only one bad was incorporated in hyperbolic distance functions, the efficiency loss and private abatement cost measures derived from the two models were equivalent, but potential pollution reduction and good output expansion differed; (ii) when more than one bad were introduced, the equivalence of efficiency loss measure in (i) did not hold; and (iii) the potential amounts of pollution reduction and good output expansion were larger when bads were modeled as inputs. With multiple bads, private abatement costs varied considerably under the two modeling treatments.

Practical implications

From a policy standpoint, the results suggest that one should consider the modeling options with caution when multiple economic bads are involved, because the resulting measures of economic burden of pollution control differ.

Originality/value

The paper shows that the traditional conceptual framework for modeling pollution in hyperbolic distance functions could yield inconsistent results.

Citation

Hoon Lim, S. (2014), "Accounting for environmental pollution in production function", Management of Environmental Quality, Vol. 25 No. 6, pp. 679-695. https://doi.org/10.1108/MEQ-08-2013-0087