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Scale Elasticity and Returns to Scale

In: Handbook of Production Economics

Author

Listed:
  • Victor V. Podinovski

    (Loughborough University)

  • Finn R. Førsund

    (University of Oslo)

Abstract

This chapter presents conventional and recent developments of the notions of scale elasticity and returns to scale, in both the neoclassical economics framework and the nonparametric methodology of data envelopment analysis. In addition to the standard development of these notions, this chapter provides a rigorous exposition of their extensions to the case of nonsmooth production frontiers, partial scale characteristics, general polyhedral technologies, and global returns to scale. We show that this broad range of extensions naturally arises from the introduction of an output response function that, in a general setting, describes a proportional response of any subset of inputs and outputs to marginal proportional changes of another subset, as observed on the production frontier. This function is closely related to the directional distance function and provides a natural language for the definition and computation of different scale characteristics in both the neoclassical and nonparametric frameworks.

Suggested Citation

  • Victor V. Podinovski & Finn R. Førsund, 2022. "Scale Elasticity and Returns to Scale," Springer Books, in: Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), Handbook of Production Economics, chapter 17, pages 681-719, Springer.
    • Handle: RePEc:spr:sprchp:978-981-10-3455-8_23
    DOI: 10.1007/978-981-10-3455-8_23
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