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


  • Rita Martins

    () (Faculdade de Economia, Universidade de Coimbra)

  • Adelino Fortunato

    () (GEMF and Faculdade de Economia, Universidade de Coimbra)

  • Fernando Coelho



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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    References listed on IDEAS

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    Cited by:

    1. Carvalho, Pedro & Marques, Rui Cunha & Berg, Sanford, 2012. "A meta-regression analysis of benchmarking studies on water utilities market structure," Utilities Policy, Elsevier, vol. 21(C), pages 40-49.
    2. 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.
    3. Kristof De Witte & Elbert Dijkgraaf, 2007. "Mean and Bold?," Tinbergen Institute Discussion Papers 07-092/3, Tinbergen Institute.
    4. Michael Zschille & Matthias Walter, 2012. "The performance of German water utilities: a (semi)-parametric analysis," Applied Economics, Taylor & Francis Journals, vol. 44(29), pages 3749-3764, October.
    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. 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.
    7. repec:pal:jorsoc:v:61:y:2010:i:2:d:10.1057_jors.2008.129 is not listed on IDEAS
    8. 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.
    9. 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.
    10. 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.
    11. Michael Zschille, 2014. "Marktstrukturen in der Trinkwasserversorgung," DIW Roundup: Politik im Fokus 43, DIW Berlin, German Institute for Economic Research.
    12. 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.
    13. repec:spr:waterr:v:31:y:2017:i:8:d:10.1007_s11269-016-1376-9 is not listed on IDEAS
    14. Abbott, Malcolm & Cohen, Bruce, 2009. "Productivity and efficiency in the water industry," Utilities Policy, Elsevier, vol. 17(3-4), pages 233-244, September.

    More about this item


    cubic function; multi-product cost function; water utilities; regulatory policy;

    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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