Applied Economics, 2012, 44, 39-47 Substitutability among undesirable outputs Rolf Fare a , Shawna Grosskopf b , Carl A. Pasurka Jr c ,* and William L. Weber d a Department of Economics and Department of Agriculture and Resource Economics, Oregon State University, Corvallis, OR, USA b Department of Economics, Oregon State University, Corvallis, OR, USA cus Environmental Protection Agency (1809T) , Office of Policy, Economics and Innovation, 1200 Pennsylvania Ave., NW Washington, DC 20460, USA d Department of Economics and Finance, Southeast Missouri State University, Cape Girardeau, MO, USA In recent years, economists have started to move beyond calculating regulatory effects on a pollutant-by-pollutant basis since their interaction is important. In this study, we take up this issue. To allow for joint production of multiple pollutants and marketable output, we specify our technology using a directional distance function. This allows us to treat pollutants as joint outputs, yet accounts for their 'undesirability'. We estimate the distance function for a sample of coal-fired electric power plants from 1985 to 1998, which includes the first 4 years of Phase I of the Clean Air Act Amendments of 1990. We focus on the interaction between S02 and NO x , as they became more highly regulated and estimate shadow prices of the pollutants and the Morishima elasticity of transformation between two pollutants, NO x and SOb as well as with respect to the desirable output, kilowatt-hours of electricity. As expected, we find that power plants increase NO x emissions as they decrease S02, i.e. they are substitutes. I. Introduction Technologies like coal-fired electric utilities and steel plants produce, in general, more than one pollutant or bad (undesirable) output. Early efforts to evaluate regulatory impacts proceeded on a pollutant- by-pollutant basis. In recent years, however, econo- mists have moved beyond calculating the effect of single pollutants in recognition of the fact that the interaction among pollutants is important, especially from a policy perspective. 1 For instance, increasingly tight regulations on S02 (sulphur dioxide) emissions might cause electric power plants to substitute (i.e. assign fewer inputs to abate) a less regulated pollut- ant, such as NO x (nitrogen oxides), or reduce the production of electricity. *Corresponding author. E-mail: pasurka.carl@epa.gov Researchers have used a variety of strategies to calculate whether reducing the production of one bad output may result in the increase of another bad output (Greenstone, 2003; Gamper-Rabindran, 2006). As an example, Burtraw et al. (2003) calculate the reduction III undesirable or bad output 1 Montero (2001) and Schmieman et al. (2002) developed theoretical models of joint abatement. Applied Economics ISSN 0003-6846 print/ISSN 1466-4283 online © 2012 Taylor & Francis http://www.informaworld.com DOl: 10.1080/00036846.2010.498368 39