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Abstract
We present an approach that pursues an adequate representation of product transformation
possibilities for a technology generating, in addition to marketed (good) products, some
environmentally detrimental non-marketed byproducts (bad outputs). As the shadow price of
a non-marketed output depends on its marginal transformation rates with marketed outputs,
representation of technological relationships between different groups of outputs deserves a
particular attention. We model the technology by using two functions: an input distance
function describing technically feasible input-output combinations, and a hedonic output
function capturing relationships among good and bad outputs. This procedure offers more
appropriate consideration and modeling of the interactions between different groups of
outputs. An empirical application of the approach to the case of Dutch dairy farms1
demonstrates the complexity of interactions between outputs and the value of more elaborate
representations of production possibilities. The analysis indicates that nitrogen surplus
abatement costs vary widely among Dutch dairy farms and that these costs have increased
substantially over time.