Cost Structure of the Portuguese Water Industry: a Cubic Cost Function Application
AbstractThe 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 InfoPaper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2006-09.
Length: 33 pages
Date of creation: 2006
Date of revision:
cubic function; multi-product cost function; water utilities; regulatory policy;
Find related papers by JEL classification:
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
- L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
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