Econometric analysis of economic and environmental efficiency of Dutch dairy farms

The Dutch government aims for competitive and sustainable farms, that use marketable inputs efficiently as well as apply environmentally detrimental variables efficiently in the production process. The objective of this research is to define, to estimate and to evaluate environmental efficiency. Environmental efficiency is a measure that allows for the combination of a firm's environmental pressure with its economic performance. If the environmental efficiency could be improved, the emission of nitrogen into the environment will decrease without loss of production or additional costs.

Three econometric methods based on the neoclassical production theory (stochastic production frontier, output distance function and shadow cost system) are transformed to enable the definition and estimation of environmental efficiency. These methods are applied to a panel of Dutch dairy farms. Nitrogen surplus is the environmentally detrimental variable throughout this thesis. In the stochastic production frontier, nitrogen surplus is modelled as an environmentally detrimental input. In the distance function N surplus is applied as a bad output. Due to the materials balance definition of N surplus the shadow price of bad output is positive. A shadow cost system is used to compute the cost-efficient and the nitrogen-efficient production. The latter is based upon the input mix that minimises the nitrogen content of variable inputs. Finally the variation in efficiency is explained in a two-stage approach with characteristics that are hypothesised to influence environmental efficiency. The environmental efficiency measures are compared to alternative environmental indicators currently used.