This study introduces the measurement of environmental inefficiency from an economic perspective that integrates, in addition to marketed good outputs, the negative environmental externalities associated with bad outputs. We develop our proposal using the latest byproduction models that consider two separate and parallel technologies: a standard technology generating good outputs, and a polluting technology for the by-production of bad outputs (Murty et al., 2012) . While research into

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... ntal inefficiency incorporating undesirable or bad outputs from a technological perspective is well established, no attempts have been made to extend it to the economic sphere. Our model defines an economic inefficiency measure that accounts for suboptimal behavior in the form of foregone private revenue and social cost excess (environmental damage). We show that economic inefficiency can be consistently decomposed according to technical and allocative criteria, considering the two separate technologies and market prices, respectively. We illustrate the empirical implementation of our approach on a set of established and complementary models using a dataset on agriculture at the level of US states. 1 See Tyteca (1996) for an exposition of early models within the non-parametric approach based on the output, input, and hyperbolic distance functions, which were subsequently implemented in a parametric framework by Cuesta, Lovell, and Zofío (2009) . 2 Free disposability of inputs implies that a reduction (increase) in inputs cannot increase (decrease) the output. 3 Weak disposability of bad outputs implies that their production can only be reduced at the expense of reducing other (good) outputs. Null-jointness implies that if zero bad outputs are produced, then zero good outputs are produced as well; that is, there is no "free-lunch" in desirable outputs.