Analysis of environmental efficiency variation : a materials balance approach

Recent literature has argued that environmental efficiency (EE), which is built on the materials balance (MB) principle, is more suitable than other EE measures in situations where the law of mass conversation regulates production processes. In addition, the MB-based EE method is particularly useful in analysing possible trade-offs between cost and environmental performance. Identifying determinants of MB-based EE can provide useful information to decision makers but there are very few empirical investigations into this issue. This article proposes the use of data envelopment analysis and stochastic frontier analysis techniques to analyse variation in MB-based EE. Specifically, the article develops a stochastic nutrient frontier and nutrient inefficiency model to analyse determinants of MB-based EE. The empirical study applies both techniques to investigate MB-based EE of 96 rice farms in South Korea. The size of land, fertiliser consumption intensity, cost allocative efficiency, and the share of owned land out of total land are found to be correlated with MB-based EE. The results confirm the presence of a trade-off between MB-based EE and cost allocative efficiency and this finding, favouring policy interventions to help farms simultaneously achieve cost efficiency and MP-based EE.