Capturing the Environment: A Metafrontier Approach to the Drinking Water Sector

Abstract

Environmental factors add complexity to the comparison between specific activities or entire entities. Decision making units with an inferior performance are tempted to invoke that their organization is different from the others in the data set. By reinterpreting and extending the metafrontier literature, we propose an all-embracing concept to fully capture the operational environment. We suggest the 'Group Specific Technical Efficiency' as a new measure to assess the overall efficiency of a utility while allowing for environmental differences. A real-world example of drinking water utilities out of 5 different countries illustrates the concept.

Keywords: Free Disposal Hull, Efficiency Measurement, Environmental Variables, Metafrontier, Water Industry

JEL Classification: C14, C61, D24, L95