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Cost Structure of the Portuguese Water Industry: a Cubic Cost Function Application

Author

Listed:
  • Rita Martins

    (Faculdade de Economia, Universidade de Coimbra)

  • Adelino Fortunato

    (GEMF and Faculdade de Economia, Universidade de Coimbra)

  • Fernando Coelho

Abstract

The 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.

Suggested Citation

  • Rita Martins & Adelino Fortunato & Fernando Coelho, 2006. "Cost Structure of the Portuguese Water Industry: a Cubic Cost Function Application," GEMF Working Papers 2006-09, GEMF, Faculty of Economics, University of Coimbra.
    • Handle: RePEc:gmf:wpaper:2006-09
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    Cited by:

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    5. Saal David S. & Arocena Pablo & Maziotis Alexandros & Triebs Thomas, 2013. "Scale and Scope Economies and the Efficient Vertical and Horizontal Configuration of the Water Industry: A Survey of the Literature," Review of Network Economics, De Gruyter, vol. 12(1), pages 93-129, March.
    6. Andrea Guerrini & Giulia Romano & Bettina Campedelli, 2013. "Economies of Scale, Scope, and Density in the Italian Water Sector: A Two-Stage Data Envelopment Analysis Approach," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 27(13), pages 4559-4578, October.
    7. Ferro, Gustavo & Lentini, Emilio & Mercadier, Augusto & Romero, Carlos A., 2010. "Retornos a escala en agua y saneamiento: estimaciones para América Latina [Returns to scale in water and sanitation: estimates for Latin Amercia]," MPRA Paper 20324, University Library of Munich, Germany, revised Jan 2010.
    8. Michael Zschille, 2014. "Nonparametric measures of returns to scale: an application to German water supply," Empirical Economics, Springer, vol. 47(3), pages 1029-1053, November.
    9. Michael Zschille, 2014. "Marktstrukturen in der Trinkwasserversorgung," DIW Roundup: Politik im Fokus 43, DIW Berlin, German Institute for Economic Research.
    10. Graziano Abrate & Clementina Bruno & Fabrizio Erbetta & Giovanni Fraquelli & Anna Giolitti, 2017. "Efficiency in the Consolidation of the Italian Water Sector," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 31(8), pages 2447-2463, June.
    11. Abbott, Malcolm & Cohen, Bruce, 2009. "Productivity and efficiency in the water industry," Utilities Policy, Elsevier, vol. 17(3-4), pages 233-244, September.
    12. Alexandr Akimov & Paul Simshauser, 2018. "Performance measurement in Australian water utilities: Current state and future directions," Discussion Papers in Finance finance:201802, Griffith University, Department of Accounting, Finance and Economics.
    13. Park, Sun-Young & Lee, Kyoung-Sil & Yoo, Seung-Hoon, 2016. "Economies of scale in the Korean district heating system: A variable cost function approach," Energy Policy, Elsevier, vol. 88(C), pages 197-203.
    14. Guerrini, Andrea & Romano, Giulia & Leardini, Chiara, 2018. "Economies of scale and density in the Italian water industry: A stochastic frontier approach," Utilities Policy, Elsevier, vol. 52(C), pages 103-111.
    15. Anna Bottasso & Maurizio Conti, 2021. "Economie di integrazione verticale ed economie di scopo nel settore idrico e fognario: alcune considerazioni alla luce dell?evidenza empirica internazionale," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2021(3), pages 89-128.
    16. Malcolm Abbott & Bruce Cohen, 2010. "Industry Structure Issues in the Water and Wastewater Sectors in Australia," Economic Papers, The Economic Society of Australia, vol. 29(1), pages 48-63, March.
    17. Ferro, Gustavo & Lentini, Emilio J. & Mercadier, Augusto C. & Romero, Carlos A., 2014. "Efficiency in Brazil's water and sanitation sector and its relationship with regional provision, property and the independence of operators," Utilities Policy, Elsevier, vol. 28(C), pages 42-51.
    18. K De Witte & E Dijkgraaf, 2010. "Mean and bold? On separating merger economies from structural efficiency gains in the drinking water sector," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(2), pages 222-234, February.
    19. Ferro, Gustavo & Lentini, Emilio J. & Mercadier, Augusto C. & Romero, Carlos A., 2013. "Eficiencia en la prestación de agua y saneamiento y su vinculación con regiones, propiedad e independencia de los prestadores en Brasil [Efficiency in water and sanitation providers and its links w," MPRA Paper 48247, University Library of Munich, Germany.
    20. Romano, Giulia & Guerrini, Andrea, 2011. "Measuring and comparing the efficiency of water utility companies: A data envelopment analysis approach," Utilities Policy, Elsevier, vol. 19(3), pages 202-209.

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    More about this item

    Keywords

    cubic function; multi-product cost function; water utilities; regulatory policy;
    All these keywords.

    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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