ESSAYS ON THE IMPACT OF POLLUTION CONTROL ON A FIRM: A DISTANCE FUNCTION APPROACH

The use of distance functions has recently become popular in production theory literature. Most of the empirical applications of distance functions have been based on the deterministic linear programming approach; few econometric studies exist. The purpose of this study is to provide new evidence on the performance of different methods in estimating output distance functions. In particular, results from deterministic and stochastic approaches and from using different functional forms of distance functions are compared. The methods are applied to study the impact of water pollution control on eight pulp plants in Finland. The results show that both approaches produce positive shadow prices for the water pollution variable. However, the results from the stochastic model are more stable. Also, the results stress the importance of carrying out sensitivity analysis when using the deterministic approach. I am grateful to helpful comments offered on a earlier version of this paper by Robert Chambers, Mika Hakuni, Pekka Ilmakunnas, and Jari Kuuluvainen. Also, helpful comments were received at the European Association of Environmental and Resource Economics Conference, June 17June 20, 1995, Umea. This research was supported by the Academy of Finland and the Nordic Council of Ministers Project “Economic Instruments in Environmental Policy: The Nordic Forest Sector”. A previous version of this paper appeared in the Finnish Forest Research Institute, Research Reports series under the title “Using Deterministic and Stochastic Distance Functions to Measure the Effects of Pollution Control on a Firm”.

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