Productivity and Profitability Changes in U.S. Electric Utility Plants Under the So2 Allowance System

We examine the productivity and profitability changes in the US electric generating plants during the SO2 trading regime. Input distance function is used to compute the cumulative Malmquist productivity and Fisher productivity indexes. By exploiting the duality between cost and input distance functions, we obtain a measure of profitability, as an approximation for the Fisher productivity index. We measure productivity and profitability changes when SO2 emissions are ignored in the production technology and when these emissions appear as bad output. We find that the productivity is higher when the bad outputs are modeled as weakly disposable in comparison to the situation when they are modeled as freely disposable. But we do not find any significant difference in profitability under these alternative methods of modeling of production technology concerning the disposability of bad outputs