The paper deals with the impact of environmental regulation on technical efficiencies of
Indian cement producing firms. The effect of environmental regulation on technical
efficiencies of firms has been an interesting theme of debate. This paper attempts to derive
the technical efficiency scores of Indian Cement producing firms in two scenarios: one in
which the firms comply to the set standards by investing additional resources for pollution
abatement and the other in which the firms do not take the effort to comply to the set
standards by investing resources for pollution abatement. Using establishment level data from
Annual Survey of Industries for two years, the most recent data published for 03-04 and a
back year for 99-00, the paper attempts to answer a simple question: does imposition of
environmental regulation reduce technical efficiencies of firms in an industry? The traditional
non-parametric Data Envelopment Analysis framework is modified by substituting free
disposability of all outputs by free disposability of good outputs and weak disposability of
bad outputs to characterize effective environmental regulation, which ensures that reducing
pollution is not costless. For both the years it has been found that the technical efficiency
scores of firms under ‘effective regulation’ scenario are either higher or equal to those
derived under ‘ineffective regulation’ scenario. This results in an average technical efficiency
at the industry level in the presence of environmental regulation which can never be lower
than that in the absence of environmental regulation. Interestingly, it has also been found that
the difference in the efficiency levels in the initial years of implementation of regulation is
higher that later, which implies that the extent of efficiency gains from regulation in its initial
phase of implementation is higher than those in the following phases.