Smallholders increasingly combine shrimp culture with the more traditional rice enterprise in regions of Thailand suitable for raising shrimps. They can exploit cost complementarities in production by combining activities in these enterprises within their farming systems. At the same time, it makes them more susceptible to on-farm negative externalities between rice and shrimp production, in both directions, causing scope diseconomies. A stochastic input distance model is estimated using data on shrimp and rice production by 52 smallholder households. Results from the estimated model are used to establish whether scope economies or diseconomies exist and whether specialisation in either shrimp or rice production significantly influences technical efficiency on the sampled smallholdings. Significant scope economies were found to exist between the two enterprises among best-practice smallholders but they were offset by diversification inefficiencies beneath the frontier. Hence, specialisation in one of the two enterprises has two effects on productivity that operate in opposite directions. The first effect is a negative impact on productivity via loss of scope economies. The second effect is an increase in productivity by reaping specialisation efficiencies or, put another way, avoidance of diversification inefficiencies. If on-farm negative externalities between rice and shrimp production do exist, they appear to be strongly outweighed by cost complementarities on the frontier. It is likely that 'best-practice' smallholders are able to 'internalise' the negative externalities in both directions to a substantial degree. They achieve this 'internalisation' by regular use of fresh water in a semi-closed pond system of shrimp production that minimises pond contamination and protects them from the activities of surrounding producers who discharge effluent into the waterways or whose shrimp suffer from diseases. In addition to the degree of enterprise specialisation, the level of schooling of the household head and the tenure system in shrimp and rice production were identified as variables that significantly influence technical inefficiency. As expected, higher education is associated with lower technical inefficiency. Tenancy is also associated with lower technical inefficiency. Results indicate that a small but significant level of technical inefficiency exists, which means there is limited opportunity to expand crop output without resort to greater use of factor inputs or the introduction of improved production technologies.