Including local air pollution in airport efficiency assessment: A hyperbolic-stochastic approach

•A hyperbolic stochastic frontier analysis is applied to a dataset of Italian airports.•Airports efficiency increases when local air pollution is included in the analysis.•Technical/environmental efficiency estimates are affected by the fleet mix effect.•There is complementarity between desirable and undesirable outputs.

We examine data from Italian airports covering 2005–2008 to include local environmental effects in airport efficiency assessment. We consider both desirable outputs such as aircraft, passengers, and freight movements and some undesirable outputs of airport operations associated with local air pollution. We estimate both a classical distance function with no undesirable output, and a hyperbolic distance function. By comparing the estimated efficiency scores with these two frontiers we show that airport efficiency increases when local air pollution is included in the analysis. Moreover, we show a fleet-mix effect because airports with similar aircraft movements exhibit large variations in the amount of pollution per flight. Last, we find that there is complementarity between desirable and undesirable output: a 1% decrease in pollution has an opportunity cost of a 0.67% reduction in both passenger and freight traffic.