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Estimating the shadow prices of SO2 and NOx for U.S. coal power plants: A convex nonparametric least squares approach

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  • Mekaroonreung, Maethee
  • Johnson, Andrew L.

Abstract

Weak disposability between outputs and pollutants, defined as a simultaneous proportional reduction of both outputs and pollutants, assumes that pollutants are byproducts of the output generation process and that a firm can “freely dispose” of both by scaling down production levels, leaving some inputs idle. Based on the production axioms of monotonicity, convexity and weak disposability, we formulate a convex nonparametric least squares (CNLS) quadratic optimization problem to estimate a frontier production function assuming either a deterministic disturbance term consisting only of inefficiency, or a composite disturbance term composed of both inefficiency and noise. The suggested methodology extends the stochastic semi-nonparametric envelopment of data (StoNED) described in Kuosmanen and Kortelainen (2011). Applying the method to estimate the shadow prices of SO2 and NOx generated by U.S. coal power plants, we conclude that the weak disposability StoNED method provides more consistent estimates of market prices.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 3 ()
Pages: 723-732

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:3:p:723-732

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Frontier estimation; Nonparametric regression; Parametric programming; Shadow pricing;

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References

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Citations

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Cited by:
  1. Keshvari, Abolfazl & Kuosmanen, Timo, 2013. "Stochastic non-convex envelopment of data: Applying isotonic regression to frontier estimation," European Journal of Operational Research, Elsevier, vol. 231(2), pages 481-491.
  2. Lee, Chia-Yen & Johnson, Andrew L. & Moreno-Centeno, Erick & Kuosmanen, Timo, 2013. "A more efficient algorithm for Convex Nonparametric Least Squares," European Journal of Operational Research, Elsevier, vol. 227(2), pages 391-400.
  3. Kuosmanen, Timo & Saastamoinen, Antti & Sipiläinen, Timo, 2013. "What is the best practice for benchmark regulation of electricity distribution? Comparison of DEA, SFA and StoNED methods," Energy Policy, Elsevier, vol. 61(C), pages 740-750.
  4. Eskelinen, Juha & Kuosmanen, Timo, 2013. "Intertemporal efficiency analysis of sales teams of a bank: Stochastic semi-nonparametric approach," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5163-5175.
  5. Kuosmanen, Timo, 2012. "Stochastic semi-nonparametric frontier estimation of electricity distribution networks: Application of the StoNED method in the Finnish regulatory model," Energy Economics, Elsevier, vol. 34(6), pages 2189-2199.

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