Abstract
Knowledge on the scale economies drives the incentives of regulators, governments and individual utilities to scale-up or scale-down the scale of operations. This paper considers the returns to scale (rts) in non-convex frontier models. In particular, we evaluate rts assumptions in a free disposal hull model, which accounts for uncertainty and heterogeneity in the sample. Additionally, we provide a three-step framework to empirically analyze the existence and extent of rts in real world applications. In a first step, the presence of scale (and scope) economies is verified. Secondly, rts for individual observations are examined while in a third step we derive the optimal scale for a sector as a whole. The framework is applied to the portuguese drinking water sector where we find the optimal scale to be situated around 7–10 million m3.
Original language | English |
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Pages (from-to) | 213-226 |
Journal | Journal of Productivity Analysis |
Volume | 35 |
Issue number | 3 |
DOIs | |
Publication status | Published - Jun 2011 |
Keywords
- Free Disposal Hull
- Economies of scale
- Optimal size
- Water sector