Economic Analysis of Agricultural Investments

Abstract

The purpose of this paper is to introduce a modification of a standard four input production process where energy is used in an inefficient way due to partly unnecessary waste of energy. The changes in production efficiency investigated using stochastic frontier methods, show declining technical efficiency in livestock production and especially low marginal contribution of labor inputs. The number of workers, size of farm, and distance from nearest city are related to efficiency in agricultural production. It is well known that results from an environmental policy in response to global climate change are quite sensitive to the assumption on the rate of energy efficiency improvements. However, technical progress is traditionally considered as a non-economic variable in economic policy models. It is exogenous in most policy evaluations as well as in the theory of environmental economics.