ANALYSIS Shadow prices of environmental outputs and production efficiency of household-level paper recycling units in Vietnam Nguyen Van Ha a,1 , Shashi Kant b, ⁎ , Virginia Maclaren c,2 a Forestry University of Vietnam, Xuan Mai — Chuong My — Ha Tay, Vietnam b Faculty of Forestry, University of Toronto, 33 Willcocks St., Toronto, Ontario, Canada M5S 3B3 c Department of Geography, University of Toronto, 100 St. George St., Toronto, Ontario, Canada M5S 3G3 ARTICLE INFO ABSTRACT Article history: Received 8 May 2006 Received in revised form 10 May 2007 Accepted 1 June 2007 Available online 13 July 2007 The production efficiency and shadow prices of three environmental outputs (BOD, COD, and SS) of 63 household-level paper-recycling units, from a recycling craft village in Vietnam, are assessed A two-stage procedure, linear programming and stochastic estimation, is used to estimate output distance function. Social capital as a production factor and environmental outputs are included in the output distance function. Results indicate that production efficiencies could potentially be improved by 28%. There is a substantial variation in the shadow prices of environmental outputs among the production units of different types of paper products. Furthermore, the average shadow prices of the three environmental outputs are all positive. This indicates a potential for improving environmental quality though introducing pollution- prevention methods to paper-recycling production processes in Vietnam (e.g., recirculation of wastewater), and suggests that it may be inappropriate to restrict the shadow prices of environmental outputs to be non-positive for the analysis of some production processes. © 2007 Elsevier B.V. All rights reserved. Keywords: Efficiency Environmental outputs Household production Output distance functions Paper recycling Shadow prices Social capital Waste management Vietnam 1. Introduction The growing concerns about environmental problems and the burden placed by industrial activities on environmental quality have prompted scientists to accommodate joint production of good and bad outputs into models of productivity and efficiency analysis. The methods employed include index number approaches, distance functions, and data envelopment analysis. Pittman (1983) was the first to extend the multilateral produc- tivity measurement technique of Caves, Christensen, and Diewert (1982a,b) to include the possibility of undesirable outputs in multilateral productivity and efficiency measurement. Since Pittman's study, many studies (e.g., Färe et al., 1989, 1993, 1996; Yaisawarng and Klein, 1994) have incorporated undesirable outputs into efficiency analysis. More recently, there has been growing interest in using a distance function approach to incorporate environmental outputs into efficiency measurement and to derive shadow prices of undesirable outputs (e.g., Färe et al., 1993; Ball et al., 1994; Yaisawarng and Klein, 1994; Coggin and Swinton, 1996; Hetemäki, 1996; Hailu and Veeman, 2000). The main advantage of the distance function approach is that it allows production modeling of a multi-input and multi- ECOLOGICAL ECONOMICS 65 (2008) 98 – 110 ⁎ Corresponding author. Tel.: +1 416 978 6196. E-mail addresses: ngvanha@yahoo.com (N. Van Ha), shashi.kant@utoronto.ca (S. Kant), maclaren@geog.utoronto.ca (V. Maclaren). 1 Tel.: +84 91 511 2686. 2 Tel.: 1 416 978 1594. 0921-8009/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2007.06.003 available at www.sciencedirect.com www.elsevier.com/locate/ecolecon