3.1. Calculating environmental efficiency with a SFA model
Environmental variables are introduced into a traditional production function in order to derive environmental efficiency scores from adjustments of conventional measures of technical efficiency.
Technical efficiency is first derived from a production frontier under the hypothesis that a non-optimal use of production factors by agricultural farmers, i.e., an X-inefficiency (Leibenstein, 1966), is the effect of labor and credit constraints. Assuming that on a plot i, a given farmer uses traditional X inputs to produce single or multiple conventional Y outputs, a production function can be written to represent a particular technology: Yi =f(xi), where f(xi) is a production frontier. On the frontier, the farmer produces the maximum output for a given set of traditional inputs or uses the minimum set of traditional inputs to produce a given level of output. In standard microeconomic theory, there is no inefficiency in the economy, implying that all production functions are optimal and all firms produce at the frontier. However, if markets are imperfect, farmers' yields can be pulled below the production frontier.