Measuring Environmental Efficiency and Cost of Pollution Abatement: An Application of Directional Distance Function to Indian Cement Industry

Production of desirable output often generates undesirable by-product which has detrimental impact on the environment. This paper, considering carbon dioxide as an undesirable by product of cement, aims at measuring environmental efficiency of Indian cement industry within a joint production framework of both desirable and undesirable output. Environmental efficiency is defined as the ability of a producer to simultaneously increase the desirable output and reduce the undesirable one. We use 3 digit state level data from the Annual Survey of Industries for the years 2000-01 through 2004-05 and apply Directional Distance Function for the empirical analysis. The empirical results show that Indian cement industry, with environmental regulation, has the potential of expanding desirable output and contracting undesirable one from the given inputs. However, regulation has a cost in terms of lower feasible expansion of desirable output as compared to the unregulated scenario.