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A Distance Function Model with Good and Bad Outputs

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  • Bokusheva, Raushan
  • Kumbhakar, Subal C.

Abstract

We present an approach that pursues an adequate representation of product transformation possibilities for a technology generating, in addition to marketed (good) products, some environmentally detrimental non-marketed byproducts (bad outputs). As the shadow price of a non-marketed output depends on its marginal transformation rates with marketed outputs, representation of technological relationships between different groups of outputs deserves a particular attention. We model the technology by using two functions: an input distance function describing technically feasible input-output combinations, and a hedonic output function capturing relationships among good and bad outputs. This procedure offers more appropriate consideration and modeling of the interactions between different groups of outputs. An empirical application of the approach to the case of Dutch dairy farms1 demonstrates the complexity of interactions between outputs and the value of more elaborate representations of production possibilities. The analysis indicates that nitrogen surplus abatement costs vary widely among Dutch dairy farms and that these costs have increased substantially over time.

Suggested Citation

  • Bokusheva, Raushan & Kumbhakar, Subal C., 2014. "A Distance Function Model with Good and Bad Outputs," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182765, European Association of Agricultural Economists.
  • Handle: RePEc:ags:eaae14:182765
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    File URL: http://ageconsearch.umn.edu/record/182765/files/Bokusheva-Distance_function_model_with_good_and_bad_outputs-258_a.pdf
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    References listed on IDEAS

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    1. Fernandez C. & Koop G. & Steel M.F.J., 2002. "Multiple-Output Production With Undesirable Outputs: An Application to Nitrogen Surplus in Agriculture," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 432-442, June.
    2. Luenberger, David G., 1992. "Benefit functions and duality," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 461-481.
    3. Murty, Sushama & Russell, R. Robert, 2010. "On modeling pollution-generating technologies," The Warwick Economics Research Paper Series (TWERPS) 931, University of Warwick, Department of Economics.
    4. David Stern, 2011. "Elasticities of substitution and complementarity," Journal of Productivity Analysis, Springer, vol. 36(1), pages 79-89, August.
    5. Atakelty Hailu & Robert Chambers, 2012. "A Luenberger soil-quality indicator," Journal of Productivity Analysis, Springer, vol. 38(2), pages 145-154, October.
    6. Fare, Rolf, et al, 1989. "Multilateral Productivity Comparisons When Some Outputs Are Undesirable: A Nonparametric Approach," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 90-98, February.
    7. Fare, Rolf & Grosskopf, Shawna & Noh, Dong-Woon & Weber, William, 2005. "Characteristics of a polluting technology: theory and practice," Journal of Econometrics, Elsevier, vol. 126(2), pages 469-492, June.
    8. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275, December.
    9. Stijn Reinhard & C.A. Knox Lovell & Geert Thijssen, 1999. "Econometric Estimation of Technical and Environmental Efficiency: An Application to Dutch Dairy Farms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 44-60.
    10. Charles Blackorby & R. Robert Russell, 1981. "The Morishima Elasticity of Substitution; Symmetry, Constancy, Separability, and its Relationship to the Hicks and Allen Elasticities," Review of Economic Studies, Oxford University Press, vol. 48(1), pages 147-158.
    11. Subal C. Kumbhakar & Efthymios G. Tsionas, 2008. "Estimation of input-oriented technical efficiency using a nonhomogeneous stochastic production frontier model," Agricultural Economics, International Association of Agricultural Economists, vol. 38(1), pages 99-108, January.
    12. Coggins, Jay S. & Swinton, John R., 1996. "The Price of Pollution: A Dual Approach to Valuing SO2Allowances," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 58-72, January.
    13. Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August.
    14. Hailu, Atakelty & Veeman, Terrence S., 2000. "Environmentally Sensitive Productivity Analysis of the Canadian Pulp and Paper Industry, 1959-1994: An Input Distance Function Approach," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 251-274, November.
    15. Rolf Färe & Shawna Grosskopf, 1998. "Shadow Pricing of Good and Bad Commodities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(3), pages 584-590.
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    17. Grigorios Emvalomatis & Spiro E. Stefanou & Alfons Oude Lansink, 2010. "A Reduced-Form Model for Dynamic Efficiency Measurement: Application to Dairy Farms in Germany and The Netherlands," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(1), pages 161-174.
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    Cited by:

    1. Silva, Felipe & Fulginiti, Lilyan & Perrin, Richard, 2016. "Trade-off between amazon forest and agriculture in Brazil – shadow price and their substitution estimative for 2006," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235800, Agricultural and Applied Economics Association.
    2. Silva, Felipe & Fulginiti, Lilyan E. & Perrin, Richard K., 2016. "Did technical change in agricultural production decrease the emission of pollutants on the Amazon Forest during 1990-2009?," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230092, Southern Agricultural Economics Association.

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