Environmental externalities and efficiency measurement

Production of desirable outputs often produces by-products that have harmful effects on the environment. This paper investigates technologies where the biggest good output producer is not the greatest polluter, i.e. technologies located on the downward-sloping segment of the frontier depicted in Fare et al. (1989). Directional distance functions and Data Envelopment Analysis techniques are used to define an algorithm that allows them to be identified empirically. Furthermore, we show that in such situations producers can contribute social goods, i.e. reducing polluting wastes, without limiting their capacity to maximise production of marketable output. Finally, we illustrate our methodology with an empirical application to a sample of Spanish ceramic tile producers. (C) 2009 Elsevier Ltd. All rights reserved.