Common to all these studies is a reduced form approach which typically ignores theunderlying production process which converts inputs into outputs and pollutants, while infact it is the modification or transformation of the production process that may lead toimproved environmental performance at higher income levels. Furthermore, the fact thatthese studies analyze the relationship between environmental performance and growth foreach of the many pollutants individually, i.e., in a partial equilibrium framework, impliesthat a clear-cut policy conclusion is very unlikely. The obvious need for a single environmental performance index and a method whichimplicitly recognizes the underlying production process which transforms inputs into2
outputs and pollutants gave rise to a number of studies which focus on production theoryin measuring environmental performance. These studies, by exploiting the aggregatorcharacteristics of distance functions, derived various indexes which measure theenvironmental efficiency of various producing units. For example Färe, Grosskopf andPasurka (1989), by using radial measures of technical efficiency, compute the opportunitycost of transforming a technology from one where production units costlessly releaseenvironmentally hazardous substances, to one in which it is costly to release. In anotherstudy, Färe, Grosskopf, Lovell and Pasurka (1989) suggested an hyperbolic measure ofefficiency (which allows for simultaneous equiproportionate reduction in the undesirableoutput and expansion in the desirable outputs2) in measuring the opportunity cost of suchtransformation. Finally Zaim and Taskin (2000) and Taskin and Zaim (2000) by applyingthese techniques to macro level data provided evidence for the existence of a Kuznetstype relationship between measures of environmental efficiency and per capita incomelevel.In a more recent study, Färe, Grosskopf and Hernandez-Sancho (1999) propose analternative index number approach to environmental performance which measures thedegree to which a plant or a firm succeeds in expanding its good outputs whilesimultaneously accounting for bad outputs. The proposed index consists of the ratio ofthe quantity index of good outputs to a quantity index of bad outputs, the implicitbenchmark being the highest ratio of good to bad outputs. In this study we first explorethe environmental productivity of the OECD countries between 1971-1990 and thenexamine the existence of a Kuznets type relationship between income and environmentalproductivity as measured by this new index. Thus we provide a means of simultaneouslyaccounting for multiple pollutants within a production theoretic framework that is at oncerigorous (based on axiomatic production theory) yet unrestrictive - our empiricaltechnique imposes no functional form on the underlying technology. In fact we usedistance functions, natural aggregator functions as our building blocks, which yield indexnumbers consistent with the properties laid out by Fisher (1922).
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- Environmental Economics, Per capita income, Random effects model, environmental performance, Environmental Performance Index