Both policy and technical analysis of water delivery systems have been based on cost functions that are inconsistent with or are incomplete representations of the neoclassical production functions of economics. We present a full-featured production function model of water delivery which can be estimated from a multiproduct, dual cost function. The model features implicit prices for own-water inputs and is implemented as a jointly estimated system of input share equations and a translog cost function. Likelihood ratio tests are performed showing that a minimally constrained, full-featured production function is a necessary specification of the water delivery operations in our sample. This, plus the model's highly efficient and economically correct parameter estimates, confirms the usefulness of a production function approach to modeling the economic activities of water delivery systems.
We respond to criticisms raised by Robert McGuire and Robert Ohsfeldt concerning our comparative cost study of regulated private and public water delivery firms, Review of Economics and Statistics (November 1983). Summary results from our subsequent and ongoing research are included as empirical responses to their econometric questions. Model replications estimated from superior data confirm the 1983 results, that pooling of public-private cost functions cannot be rejected. In addition to conceptually defending our study methodology, we argue that cost comparisons, although difficult, are a legitimate means of assessing effects that alternative ownerships may have on production of water delivery services.
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