Measuring technical efficiency and shadow price of water pollutants for the leather industry in India: a directional distance function approach

This paper measures the cost of reducing pollution from the Kanpur leather industry which is a prime source of pollution in India’s largest river basin of Ganges. The study uses directional distance function approach to examine the efficiency of leather firms in abating two undesirable pollutants (total suspended solids and chromium) while expanding the desirable leather output, and provides robust estimates of the marginal abatement cost for different production and pollution abatement strategies. The study is based on the primary data collected for 61 firms in Kanpur leather cluster for the year 2016. The results show that leather firms are technically inefficient and incur high abatement cost under the existing command and control regulations. The least inefficient strategy is a balanced policy that allows firms to reduce pollution without compromising their goal of output expansion. The study finds that old, small and more pollution intensive firms can abate pollution at least cost under a market-based regime. The shadow price of pollutants estimated in this paper are useful tools in determining equilibrium discharge permit price for design of market-based instruments.