Economic and Technical Efficiency of the Biomass Industry in China: A Network Data Envelopment Analysis Model Involving Externalities

This paper proposes the network data envelopment analysis (DEA) model accounting for negative externalities and applies it for decomposition of profit inefficiency in the biomass-agriculture circular system (Bio-AG system). A circular structure of the Bio-AG system which is different from the previously applied network structures is assumed. Since the negative externalities (i.e., pollutant emissions from the biomass industry) occur in the Bio-AG system, the property rights are taken into consideration to model the externalities-adjusted profits. Therefore, the changes in profits due to changes in the property rights (assuming no property rights, allocating property rights to agricultural sector, and allocating property rights to biomass power generation sector) are quantified. Further, the decomposition shows that the biomass power generation sector is less affected by technical inefficiency if contrasted to allocative inefficiency in terms of the profit loss. The findings suggest that the biomass power generation technology influences the profits of the biomass industry. What is more, the inefficient allocation of resources is now the key factor undermining performance of the biomass industry. Therefore, the government should adopt measures to improve the allocation of resources and prevent excessive investments or development of less efficient technologies.