BOD7 production function of the finnish pulp and paper industry

Traditional neoclassical production theory analyzes the relationship in a production process between inputs and outputs which have a positive market value for the producer. The externalities of production, which have nonpositive market values, are discarded or included as the cost in a cost function. This paper studies the relationship between biological oxygen demand (BOD) emissions, an output of nonpositive value, and traditional factors of production, that is, investments, labor, output, and raw materials. An emissions production function is theoretically presented and empirically estimated with data from the Finnish pulp and paper industry. The approach is based on the observation that it is the minimization of effluents rather than, or together with, the maximization of yields, that increasingly defines the technological frontier of production processes. The empirical function estimation demonstrates the validity of the proposed novel modeling approach. (JEL O40, Q20).