New Directions in Productivity Measurement and Efficiency Analysis
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New Directions in Productivity Measurement and Efficiency Analysis

Counting the Environment and Natural Resources

Edited by Tihomir Ancev, M. A.S. Azad and Francesc Hernández-Sancho

This book explores novel research perspectives on the intersection of environmental/natural resource economics and productivity analysis, emphasizing the link between productivity and efficiency measurement and environmental impacts. The purpose of the book is to present new approaches and methods for measuring environmentally adjusted productivity and efficiency, and for incorporating natural resources in standard national accounting practices. These methods are applicable in many contexts, including air and water pollution, climate change, green accounting, and environmental regulation
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Chapter 10: Valuing environmental and health impacts from no action in wastewater management

Francesc Hernández-Sancho, Birguy Lamizana-Diallo and William Ingram

Abstract

Efficient wastewater management results in significant environmental and health benefits. Because some of these benefits do not have a market price, traditionally they were not considered in financial analyses of wastewater treatment projects. However, economic assessment through cost-benefit analysis considers it fundamental to integrate market and non-market impacts derived from the project to be evaluated. Without this, there is an underestimation of the benefits derived from implementing efficient wastewater treatment systems. In other words, evaluation of the environmental and health costs of no action is necessary to justify suitable investment policies in efficient wastewater treatment. The estimation of the environmental costs of no action requires application of economic valuation methods since the value of such costs cannot be obtained directly from marketable transactions. There are two approaches to achieve this aim. The traditional approach involves methods based on the demand response in light of the neoclassical view that economic value arises from the interaction between an individual and an environmental asset as an expression of individual preferences. An alternative approach, pursued in this chapter, is to estimate the shadow prices of pollutants that would be removed as a consequence of the implementation of an efficient wastewater treatment. This alternative approach is derived from a ‘cost of production perspective’ and uses the concept of distance function to estimate shadow prices. They represent the value of external effects that could damage the environment if wastewater is inefficiently managed. Several empirical applications verify the reliability and usefulness of estimating shadow prices of wastewater pollutants as a proxy to estimate the environmental costs of no action.

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