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Cost Structure of the Portuguese Water Industry: a Cubic Cost Function Application

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Author Info

  • Rita Martins

    ()
    (Faculdade de Economia, Universidade de Coimbra)

  • Adelino Fortunato

    ()
    (GEMF and Faculdade de Economia, Universidade de Coimbra)

  • Fernando Coelho

    ()

Abstract

The main scope of this paper is to confirm, or otherwise, the idea usually presented in national reports and strategic programmes for the water sector that the Portuguese water market is a natural monopoly. Based on a multi-product approach (considering the m3 of potable water delivered and wastewater collected as the outputs) we use a cubic functional specification to estimate water utilities cost function, and then to look for the presence of economies of scale and of scope. The estimated results show that the average production scale is below the estimated minimum efficient scale and that large utilities have moderate overall diseconomies of scale and scope. In addition, there are moderate economies of scope from the joint production of potable water and wastewater collection up to the minimum efficient scale, suggesting advantages in merging small and medium sized contiguous water utilities. Sufficient conditions for subadditivity of costs are not verified throughout the range of outputs, allowing us to conclude that the Portuguese water industry is not a natural monopoly for all output vectors.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2006-09.

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Length: 33 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:gmf:wpaper:2006-09

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Keywords: cubic function; multi-product cost function; water utilities; regulatory policy;

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References

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  1. David S Saal & David Parker, 2000. "The impact of privatization and regulation on the water and sewerage industry in England and Wales: a translog cost function model," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(6), pages 253-268.
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  3. Bhattacharyya, Arunava & Harris, Thomas R. & Narayanan, Rangesan & Raffiee, Kambiz, 1995. "Specification and estimation of the effect of ownership on the economic efficiency of the water utilities," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 25(6), pages 759-784, December.
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Citations

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Cited by:
  1. Abbott, Malcolm & Cohen, Bruce, 2009. "Productivity and efficiency in the water industry," Utilities Policy, Elsevier, Elsevier, vol. 17(3-4), pages 233-244, September.
  2. Carvalho, Pedro & Marques, Rui Cunha & Berg, Sanford, 2011. "A meta-regression analysis of benchmarking studies on water utilities market structure," MPRA Paper 32894, University Library of Munich, Germany.
  3. Ferro, Gustavo & Lentini, Emilio J. & Mercadier, Augusto C. & Romero, Carlos A., 2014. "Efficiency in Brazil's water and sanitation sector and its relationship with regional provision, property and the independence of operators," Utilities Policy, Elsevier, Elsevier, vol. 28(C), pages 42-51.
  4. Kristof De Witte & Elbert Dijkgraaf, 2007. "Mean and Bold?," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-092/3, Tinbergen Institute.
  5. Romano, Giulia & Guerrini, Andrea, 2011. "Measuring and comparing the efficiency of water utility companies: A data envelopment analysis approach," Utilities Policy, Elsevier, Elsevier, vol. 19(3), pages 202-209.
  6. Ferro, Gustavo & Lentini, Emilio & Mercadier, Augusto & Romero, Carlos A., 2010. "Retornos a escala en agua y saneamiento: estimaciones para América Latina
    [Returns to scale in water and sanitation: estimates for Latin Amercia]
    ," MPRA Paper 20324, University Library of Munich, Germany, revised Jan 2010.
  7. Ferro, Gustavo & Lentini, Emilio J. & Mercadier, Augusto C. & Romero, Carlos A., 2013. "Eficiencia en la prestación de agua y saneamiento y su vinculación con regiones, propiedad e independencia de los prestadores en Brasil
    [Efficiency in water and sanitation providers and its links
    ," MPRA Paper 48247, University Library of Munich, Germany.

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