Incorporating undesirable outputs into Malmquist TFP indices with an unbalanced data panel of Chinese power plants

In this article, we examine the effects of undesirable outputs on Malmquist Total Factor Productivity (TFP) indices. Our empirical work uses an unbalanced panel of 1626 real observations on coal-fired power plants in China during 1996--2002. In order to meet the requirement of a balanced panel for calculating the Malmquist indices, an innovative fake unit approach has been introduced. To the authors' knowledge, no other published papers on TFP change have used this method before. Our final results show that (1) the original growth path of the Chinese electricity till 2002 heavily depended upon an increase of resource input and (2) the environmental TFP change of Chinese coal-fired power plants was about 2--3% (at least with respect to SO₂), which mainly comes from technical change rather than efficiency change during the report period.