Explorations into the Production of State Government Services: Education, Welfare and Hospitals

This paper explores the production characteristics of three important U.S. state government services--public higher education, public welfare, and state psychiatric hospitals—during the last half of the twentieth century. We estimate translog cost functions for the three services and find that their production attributes are similar in a number of respects. First, production exhibits substantial economies of scale; unexploited scale economies are so severe that the average state operates on the negative portion of its marginal cost curve. Second, the analysis of technical change indicates that public education, welfare, and hospitals are affected by severe technical regression in all states, in both the long run and short run. Third, production of all three services is overcapitalized in most states; the provision of these services is not long-run efficient. Finally, we show that the Baumol-Oates cost disease of lagging productivity growth is rampant in all three services; only the short-run productivity growth in education matches the performance of the private sector, as technical regression is more than offset by the productivity-enhancing scale effect of increased enrollments.