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Production Economics and Efficiency: An Overview

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  • Chavas, Jean-Paul

Abstract

This paper offers an overview of production economics and its usefulness in economic analysis. It presents all key arguments of production economics and efficiency under general conditions and in an integrated manner. An empirical example illustrates how the methods can be applied. The paper also investigates four somewhat unexplored topics in production economics: (1) the effects of a nonconvex technology, (2) the role of profit maximization, (3) economies of diversification, and (4) pricing efficiency and the role of nonlinear pricing. While it is well-known in economics that competitive markets support efficient allocations under a convex technology, this result does not apply under nonconvexity. In this context, we argue that restoring efficiency can require nonlinear pricing. This seems important in evaluating economies of diversification; under nonconvexity, competitive markets can lead to inefficient specialization (which may be particularly concerning applied to environmental management). Implications for management and policy are discussed.

Suggested Citation

  • Chavas, Jean-Paul, 2025. "Production Economics and Efficiency: An Overview," Applied Economics Teaching Resources (AETR), Agricultural and Applied Economics Association, vol. 7(4), August.
    • Handle: RePEc:ags:aaeatr:377657
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    File URL: https://ageconsearch.umn.edu/record/377657/files/AETR_2025_0208%20Final.pdf
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    References listed on IDEAS

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    1. Jean Paul Chavas, 2015. "Coase Revisited: Economic Efficiency under Externalities, Transaction Costs, and Nonconvexity," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(4), pages 709-734, December.
    2. Esther Duflo & Michael Kremer & Jonathan Robinson, 2011. "Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya," American Economic Review, American Economic Association, vol. 101(6), pages 2350-2390, October.
    3. Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August.
    4. M. Scott Taylor, 2011. "Buffalo Hunt: International Trade and the Virtual Extinction of the North American Bison," American Economic Review, American Economic Association, vol. 101(7), pages 3162-3195, December.
    5. Timothy J. Coelli & D.S. Prasada Rao & Christopher J. O’Donnell & George E. Battese, 2005. "An Introduction to Efficiency and Productivity Analysis," Springer Books, Springer, edition 0, number 978-0-387-25895-9, May.
    6. R. G. Chambers & Y. Chung & R. Färe, 1998. "Profit, Directional Distance Functions, and Nerlovian Efficiency," Journal of Optimization Theory and Applications, Springer, vol. 98(2), pages 351-364, August.
    7. Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), 2022. "Handbook of Production Economics," Springer Books, Springer, number 978-981-10-3455-8, May.
    8. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120.
    9. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    10. Murty, Sushama & Robert Russell, R. & Levkoff, Steven B., 2012. "On modeling pollution-generating technologies," Journal of Environmental Economics and Management, Elsevier, vol. 64(1), pages 117-135.
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