Provision of environmental output within a multi-output distance function approach

This paper redefines technical efficiency by incorporating provision of environmental goods as one of the outputs of the farm. The proportion of permanent and rough grassland to total agricultural land area is used as a proxy for the provision of environmental goods. Stochastic frontier analysis was conducted using a Bayesian procedure. The methodology is applied to panel data on 215 dairy farms in England and Wales. Results show that farm efficiency rankings change when provision of environmental outputs by farms is incorporated in the efficiency analysis, which may have important political implications.

► By introducing environmental output in the analysis farm efficiency ranking changes. ► Farms located in LFAs are more efficient than those in non-LFAs. ► Farms with large arable areas are not more efficient than farms with small arable areas. ► Including environmental outputs in the analysis yields useful information to policy makers.