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Estimation of the Return on Capital in Municipal Water Systems

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  • Donald F. Vitaliano

    ()
    (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA)

Abstract

The shadow return on capital in 75 small municipal water systems is estimated using a gamma frontier variable cost function. The estimated Social Cost of capital exceeds the shadow return by an average ratio of 4.37:1, with a median capital stock inefficiency of $70, 500 per year per system owing to overinvestment in public water supply capital. In addition, actual production costs exceed minimum costs by 36 percent, with a median inefficiency of $24,300 per system. Combining both types of inefficiency and extrapolating to the seven thousand comparable systems nationwide suggests economic waste of more than $663 million per year.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0313.

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Date of creation: Nov 2003
Date of revision: Feb 2005
Handle: RePEc:rpi:rpiwpe:0313

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  1. Greene, William H., 1980. "On the estimation of a flexible frontier production model," Journal of Econometrics, Elsevier, vol. 13(1), pages 101-115, May.
  2. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  3. William Greene, 2003. "Simulated Likelihood Estimation of the Normal-Gamma Stochastic Frontier Function," Journal of Productivity Analysis, Springer, vol. 19(2), pages 179-190, April.
  4. Holtz-Eakin, Douglas, 1994. "Public-Sector Capital and the Productivity Puzzle," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 12-21, February.
  5. Greene, William H., 1990. "A Gamma-distributed stochastic frontier model," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 141-163.
  6. Martin Feldstein, 1982. "Capital Taxation," NBER Working Papers 0877, National Bureau of Economic Research, Inc.
  7. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  8. Braeutigam, Ronald R. & Daughety, Andrew F., 1983. "On the estimation of returns to scale using variable cost functions," Economics Letters, Elsevier, vol. 11(1-2), pages 25-31.
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