Estimation of the shadow prices of pollutants with production/environment inefficiency taken into account: a nonparametric directional distance function approach

This paper deals with the estimation of the shadow prices of pollutants with a nonparametric directional distance function approach, where the inefficiency involved in the production process is taken into account unlike the previous studies. The directional vector, which is critical to the estimation and subject to the criterion for an appropriate efficiency rule proposed here, is calculated by using the annual plans of power plants in terms of production and environment. In the empirical study for Korea’s electric power industry during the period of 1990–1995, we find that the average shadow prices of sulfur oxides (SOx), nitrogen oxides (NOx), and total suspended particulates (TSP) are approximately 10% lower than those calculated under the assumption of full efficiency. The methodology we propose and the findings obtained in the empirical study allow us to undertake better decision-making over a broad range of environmental policy issues.