Economic inefficiency and environmental impact: An application to aquaculture production

In industries characterized by frequent innovation and high productivity growth, substantial variation in produced quantity and input use may occur, leading to increased costs. An effect that has received little attention is that inefficiency can exacerbate environmental impacts. This effect is particularly important if environmentally damaging inputs are overused. In addition to increasing firms' costs, such inefficiency can also increase the environmental impact of the firm's activity. This makes the degree of inefficiency in an industry an issue for environmental regulators. In this paper, we estimate technical and allocative efficiency for a sample of Norwegian salmon farmers. Our results show that both technical and allocative inefficiency on average are significant in explaining the level and variation in farm costs, and that the main environmental impact due to inefficiency from the Norwegian salmon aquaculture industry has its origin in technical inefficiency. (C) 2009 Elsevier Inc. All rights reserved.