Provision of an 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 within a multi-outptut distance function framework. Permanent and rough grassland area are used as a proxy for the provision of environmental goods. The multi-output distance function approach is used to estimate technical efficiency. A Bayesian procedure involving the use of a Gibbs sampler is used to estimate the farm specific efficiency as well as the coefficients of the distance function. In addition, a number of explanatory variables for the efficiency were introduced in the analysis and posterior distributions of those were obtained. The methodology is applied to panel data on 215 dairy farms in England and Wales from the Defra Farm Business Survey. Results show that both farm efficiency rankings and determinants of inefficiency change when provision of environmental outputs by farms is incorporated in the efficiency analysis, which may have important political implications.