Scandinavian Working Papers in Economics

CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

No 2013:2: Which Bad is Worst? An Application of Leif Johansen’s Capacity Model

Rolf Färe (), Shawna Grosskopf (), Tommy Lundgren (), Per-Olov Marklund () and Wenchao Zhou ()
Additional contact information
Rolf Färe: Dept. of Economics, Oregon State University, Postal: Corvallis, , Oregon, , USA
Shawna Grosskopf: Dept. of Applied Economics, Oregon State University, Postal: Corvallis, , Oregon, , USA
Tommy Lundgren: CERE, Centre for Environmental and Resource Economics, Postal: Dept. of Forest Economics, SLU, S-901 83 Umeå
Per-Olov Marklund: CERUM, Postal: Umeå University, S-901 87 Umeå
Wenchao Zhou: CERUM, Postal: Umeå University, S-901 87 Umeå

Abstract: The production of desirable (good) outputs is frequently accompanied by unintended production of undesirable (bad) outputs. If two or more of these undesirable outputs are produced as byproducts, one may ask: ‘Which bad is worst?’ By worst we mean which bad inhibits the production of desirable outputs the most if it is regulated. We develop a model based on Leif Johansen’s capacity framework by estimating the capacity limiting effect of the bads. Our model resembles what is referred to as the von Liebig Law of the Minimum, familiar from the agricultural economics literature. To illustrate our model we apply our approach to a firm level data set from the Swedish paper and pulp industry.

Keywords: von Liebig Law of the Minimum; DEA; emissions; regulation

JEL-codes: D24; Q01; Q50

21 pages, March 20, 2013

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