Shadow prices and pollution costs in U.S. agriculture

We use the directional output distance function to derive estimates of production inefficiency, shadow prices for polluting outputs, and the associated pollution costs. Using a quadratic functional form for the directional output distance function and data for the U.S. agricultural sector during 1960-1996, we find that the pollution costs (the shadow values) from the runoff and leaching of pesticides are 6% of crop and animal revenues and are highest in the Midwest and lowest in the Western states. If states were to reduce technical inefficiency and operate on the production frontier, pollution costs could be reduced by 7%.