Efficiency and environmental regulation: a 'complex situation'

Production of desirable outputs is often accompanied by undesirable by products that have damaging effects on the environment, and whose disposal is frequently regulated by public authorities. In this paper, we compute directional technology distance functions under particular assumptions concerning disposability of bads in order to test for the existence of what we call ‘complex situations’, where the biggest producer is not the greatest polluter. Furthermore, we show that how in such situations, environmental regulation could achieve an effective reduction in the aggregate level of bad outputs without reducing the production of good outputs. Finally, we illustrate our methodology with an empirical application to a sample of Spanish tile ceramic producers.