A graph efficiency multiproduct model of corn/livestock farming: Accounting for nitrate pollution

This paper estimates a non-parametric production frontier for a population of 117 corn/livestock farms in the Corn Belt region in 1987, employing a hyperbolic graph efficiency approch. There are 7 outputs, 39 variable inputs, 4 fixed inputs, and one ‘bad’ input (residual nitrogen). Three graph efficiency models are estimated. A profit maximization model is specified to estimate a production frontier constrained only by the fixed factors. Two other models involving tax constraints are also estimated. One involves a tax directly on nitrogen and the other involves a tax directly on residual nitrogen, making the disposal of residual nitrogen costly. The nitrogen tax constraint is more effective in reducing residual nitrogen loadings and causes a larger reduction in income than the residual tax constraint.