the actual data on the inputs and outputs-both desirable and undesirable
(Kwon and Yun, 1999).

III. The Empirical Model

The present study uses the deterministic parametric method² for
estimating the output distance function. The objective of such an
exercise is to analyse the potential cost, if any, imposed on the coal fired
thermal power plants in India by the implementation of environmental
regulation. In other words, the shadow prices of reducing carbon dioxide
(i.e., the undesirable output) expressed in terms of electricity generation
(i.e. the desirable output) foregone for the coal fired thermal power plants
in India are obtained by using the output distance function and its duality
with the revenue function.

In order to derive the shadow prices by estimating the
deterministic parametric output distance function we have to initially
define its functional form. We choose to parameterise the output distance
function D₀ (x, y) as a translog function, which has been followed in the
literature (e.g., Althin, 1994; Fare et., al. 1993 etc.). Thus,

NM

(xvi) KK lnD₀(x, y) = α_o + ∑ β_n lnx_n + ∑α_m ln y_m
n=1                  m =1

NN

+ 0.5 * ∑ ∑ β „„‘ ln x_n ln x„‘
nn n n
n =1 n′= 1

MM

^{+ 0.5} * Σ Σ^α mm ' ^ln Ут ^ln Ут '

m = 1 m '= 1

NM

⁺ Σ Σ Y nm ^ln x_n ^ln Ут
n=1m =1

13

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