Environmentally Adjusted Productivity and Efficiency Measurement: A New Direction for the Luenberger Productivity Indicator

The study proposes a new way of measuring productivity and efficiency, with and without considering environmental effects from a production activity, by modifying the conventional Luenberger productivity indicator. The Luenberger approach has so far been applied in productivity and efficiency measurement in time-varying contexts. It has been mainly used in comparisons of international productivity growth and efficiency over a period of time. This study proposes the use of the Luenberger approach in an alternative way by constructing two new indicators: the Luenberger environmental indicator and the Luenberger spatial indicator. These two indicators take a spatial orientation, as opposed to the temporal orientation of the traditional Luenberger indicator. The Luenberger environmental indicator is employed to measure relative performance of productive units across space by incorporating environmental impacts in the production model. The Luenberger spatial indicator does not include environmental impacts. To compare the performance of a unit of observation to a meaningful reference, a new concept of a reference frontier, an infrafrontier, is proposed. An empirical application of these indicators is to the Australian irrigation agriculture sector taking place in eleven natural resource management regions within the Murray-Darling Basin. These newly developed indicators can be widely used in any sector of the economy to measure relative productivity and environmental efficiency.