Multifactor productivity (MFP) is increasingly used in economic policy, not least to compute potential
output. Most measures are based on a standard production function combining labour and capital, but do not
incorporate the negative by-products of the production process such as air pollution that could have deleterious
effect on health and productivity in the medium to long term (see for instance OECD (2014)). The failure to
account for the costs of environmental damages and the benefits associated with emission reduction impart a
bias to standard measures of MFP. Ignoring these dimensions can give a misleading idea of growth prospects
over the medium to long term...
