Substitutability among undesirable outputs

In recent years, economists have started to move beyond calculating regulatory effects on a pollutant-by-pollutant basis since their interaction is important. In this study, we take up this issue. To allow for joint production of multiple pollutants and marketable output, we specify our technology using a directional distance function. This allows us to treat pollutants as joint outputs, yet accounts for their 'undesirability'. We estimate the distance function for a sample of coal-fired electric power plants from 1985 to 1998, which includes the first 4 years of Phase I of the Clean Air Act Amendments of 1990. We focus on the interaction between SO2 and NOx, as they became more highly regulated and estimate shadow prices of the pollutants and the Morishima elasticity of transformation between two pollutants, NOx and SO2, as well as with respect to the desirable output, kilowatt-hours of electricity. As expected, we find that power plants increase NOx emissions as they decrease SO2, i.e. they are substitutes.