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A Production Function Approach to Regional Environmental Economic Assessments
Citation:
MACPHERSON, A. J., P. P. PRINCIPE, AND E. R. SMITH. A Production Function Approach to Regional Environmental Economic Assessments. Presented at XI European Workshop on Efficiency and Productivity Analysis, Pisa, ITALY, June 24 - 26, 2009.
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Presentation
Description:
Regional-scale environmental assessments require integrating many available types of data having inconsistent spatial or temporal scales. Moreover, the relationships among the environmental variables in the assessment tend to be poorly understood, a situation made even more complicated when socioeconomic variables are incorporated. Assessments often use multivariate statistics to describe the relationships between these variables, but multivariate analyses frequently reduce data dimensionality and are difficult to interpret by the intended audience (planners and managers). For assessments to be more useful, they must clearly describe the relationships among variables and the implications of changes in the variables. This paper uses an environmental distance function from the productivity analysis literature (Färe et al. 1989, 2007) to create a regional environmental-economic production function that characterizes the relative efficiency of geographic units in combining multiple environmental inputs to produce multiple desirable and undesirable socioeconomic and environmental outputs. The regional environmental-economic production function relies on a flexible, nonparametric specification of production relationships, making no assumptions about the functional relationships among variables. By quantifying the extent to which desirable outputs can be expanded and inputs and undesirable outputs can be contracted, the production function can help decision-makers identify the most important broad-scale management and restoration opportunities across a heterogeneous region. We present the conceptual underpinning of the production function, the assumptions related to using the approach in a regional assessment context, and a case study using variables on resource conditions and socioeconomic activities in 134 watersheds in the Mid-Atlantic region of the United States. Several models reflecting different management objectives were created by varying the desirable outputs used to calculate efficiency. Our results indicate that, depending on which outputs are specified as desirable in the models, one-quarter to one-third of watersheds are efficient in producing maximal desirable outputs with minimal undesirable outputs and input use. A perfectly efficient outcome would yield an inefficiency rating of zero, and our results show that across all watersheds, mean inefficiency ratings range from 0.9 percent to 4.4 percent, depending on which desirable outputs are selected for the analysis. When socioeconomic indicators (e.g., per capita income and population density) are used, inefficiency ratings are lower (more efficient) than when just environmental measures (e.g., percent of the landscape in wetlands or interior forest) are used. Efficiency levels are also correlated with eco-regions, with Atlantic Highlands and Southeast Coastal Plains tending to be more efficient than Mixed Woods, Southeastern Plains, and Appalachian Forests.