A Cost Function Analysis of the Australian Transportation Equipment Industry

This article investigates the existence of economies of scale and input cross and direct price elasticities of demand in the Australian motor vehicle industry. Our estimated cost elasticities were less than one (consistent with economies of scale), but not significantly less than one at the 10 per cent level for two versions of the model. However, the estimated cost elasticity was significantly less than one at approximately the 2.5 per cent level for a third. Thus, these results give some credibility to the infant industry argument for continued assistance to the Australian transportation equipment industry. A four‐input model separating domestic and foreign intermediate goods inputs suggests that while restrictions on imported components may have given some short‐run relief to the domestic components industry and increased the demand for labour domestically, they decreased the demand for domestic capital. Although the infant industry argument could support short‐run protectionist policies for the industry, it appears that such policies regarding the Australian motor vehicle industry must be designed carefully with a specified phase‐out period if long‐term adverse results are to be avoided.