Size and Cost Efficiency in the Production of Local Road Services

Abstract

The authors analyze 925 town highway departments in New York to determine potential economies from consolidation and the degree of cost efficiency. Only 15% of departments would reduce costs by merging, resulting in an average 13% reduction in expenditures. In addition, all of the towns are cost inefficient by an average 17%. Size economies are estimated using a log quadratic stochastic frontier regression model. The estimated cost curve is a textbook U shape with a mean cost elasticity of 0.97, indicating that most towns are operating at the minimum point of the curve. The composed error model is used to estimate cost inefficiency, which is not systematically linked to size inefficiency. However, 14 very small departments are quite cost inefficient.

Estimation of the Return on Capital in Municipal Water Systems

“…They also found that input proportions were not cost minimizing, but did not quantify the resulting allocative ineffi ciency. And the estimated mean u = 0.31 reported in this paper for small water systems is notably higher than the u = 0.16 reported for local highway departments in New York by Helfrich and Vitaliano (1998), who also employed a stochastic frontier cost function.…”