Measurement of technical efficiency for full cost recovery pricing

The publicly owned treatment plants in the thirty-three industrial districts located throughout Taiwan are currently under irresistible pressure to pursue financial self-sufficiency. While the authorities are much in favor of tariff increase, adequacy of the tariff structure and the treatment efficiency are of great concern by firms and interest groups. This paper first examines problems of the prevailing tariff structure that consists of multiple charge bases, and decomposes the sources contributing to the financial deficit widespread among treatment plants. We then measure the plant's technical efficiency by applying the stochastic cost frontier under panel data. Empirical results showed that man-induced inefficiency accounts for five to forty-three per cent of the total abatement cost. Among the three sources contributing to the financial deficit of the treatment plants, underestimation of the charge bases is found significant in some plants. Technical inefficiency, however, remains the most important factor contributing to the deficit in many plants.