Productivity measurement in the presence of externalities: An example from the electric power industry
Abstract
Traditional productivity measures have ensured that environmental regulations were seen as deterrents to productivity growth. Such measures are constructed in a manner which make this conclusion inevitable. Traditional productivity measures include the regulation-induced additions to inputs, whether qualitatively or quantitatively, while continuing to ignore the value of the pollution emitted. The measure proposed in this thesis is derived formally from a model of social welfare. With the exception of 'prices' for emitted pollutants, for which marginal damage estimates will proxy, the proposed measure relies upon market prices, which are then incorporated into a conventional Divisia framework. Data from the electricity generation industry are used to construct both the conventional and newly proposed TFP growth rates. The industry provides an ideal framework within which this growth measure can be tested. It is a large industry that affects a majority of society as it is both consumed as a final good and pervasively used as an intermediate good. The industry is also a large polluter. On an annual basis it has been responsible for approximately one-third of the emissions of carbon-dioxide, one-third of the emissions of nitrous oxides, and two-thirds of the sulfur dioxides emissions, nationally. Furthermore, performance of the proposed measure across various samples was allowed by the diversity of utilities in the industry both with respect to location and fuel mix. Incorporating the value of externalities results in a productivity growth measure which is substantially improved. The difference in calculated productivity gains between the two measures is shown to be sizable under a number of circumstances. As well, the empirical analysis offers some general lessons as to the treatment of various pollutants--it is clearly demonstrated that movement in one pollutant cannot be used to proxy movements in others, or be used as an indicator as to the bias of traditional TFP growth. The externality-augmented measure is shown to yield a more accurate picture of where productivity gains and losses are occurring.
Recommended Citation
Kelly Ann Chaston,
"Productivity measurement in the presence of externalities: An example from the electric power industry"
(January 1, 1998).
Boston College Dissertations and Theses.
Paper AAI9835471.
http://escholarship.bc.edu/dissertations/AAI9835471
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