Environmental efficiency measurement and the materials balance condition

The materials balance condition is a fundamental adding up condition, which essentially says that: "what goes in must come out". In this paper we argue that a number of the recently developed methods of incorporating pollution measures into standard productive efficiency models may be inconsistent with this fundamental condition. We propose an alternative method that involves the incorporation of the materials balance concept into the production model in a similar manner to which price information is normally incorporated. This produces a new environmental efficiency measure that can be decomposed into technical and allocative components, in a similar manner to the conventional cost efficiency decomposition. The approach is illustrated with the case of phosphorus emission on Belgian pig-finishing farms, using data envelopment analysis (DEA) methods. Our results indicate that a substantial proportion of nutrient pollution on these farms can be abated in a cost reducing manner.