Measuring productivity of environmentally interactive technologies: The case of agriculture and the environment

Fare and Grosskopf focus on how to estimate shadow values of exogenous exposures to externalities. They remind us that if the flow of the nonmarket good can be measured and if the exposure to that flow is exogenous to other agents in the economy (i.e., agent avoidance or mitigation is not feasible), shadow values of the exposure can be calculated from estimated primal or dual functions associated with the choices of those agents. This is a long-recognized approach to the valuation of quasi-fixed input flows (see Weaver 1983) and is appropriate in the case of environmental externalities when the associated exposure is exogenous to the impacted agent (see Pittman). However, the approach fails to take us past available results for externalities and fails to offer guidance for estimation of the productivity of other important nonmarket goods involved in environmentally interactive technologies. Importantly, the approach overlooks the implications of mitigation and avoidance actions by the firm, an issue that has been recognized as important for valuation of consumer exposure to externalities (see Weaver 1995). Gollop and Swinand focus on how traditional total factor productivity (TFP) estimates could be adjusted for changes in market failure originating welfare loss associated with changes in pollution and changes in the extent of market failure.