Policy recommendations concerning optimal scale of production units often have serious implications for the restructuring of a sector, while tests of natural monopoly have important implications for regulatory structure. The piecewise linear frontier production function framework is becoming the most popular one for assessing not only technical efficiency of operations, but also for scale efficiency and calculation of optimal scale sizes. The main purpose of the present study is to check if neoclassical production theory gives any guidance as to the nature of scale properties in the DEA model, and to empirically investigate such properties. The empirical results indicate that optimal scale may be found over almost the entire size variations in outputs and inputs, thus making policy recommendations about scale efficiency dubious. It is necessary to establish the nature of optimal scale before any practical use can be made. Proposals for such indexes that should be calculated are provided.
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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number
14-2002.
Length: 26 pages Date of creation: Feb 2002 Date of revision: Handle: RePEc:icr:wpicer:14-2002
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
McFadden, Daniel, 1978.
"Cost, Revenue, and Profit Functions,"
Histoy of Economic Thought Chapters,
in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1
McMaster University Archive for the History of Economic Thought.
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