Economies of Scale in U.S. Electric Power Generation (1976). Authors: Laurits R. Christensen and William H. Greene Presented by: Jared Hayden Econ 435. Overview. Study aims to e stimate economies of scale for U.S. firms producing electric power
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Economies of Scale in U.S. Electric Power Generation(1976)
Authors: Laurits R. Christensen and William H. Greene
Presented by: Jared Hayden
Study aims to estimate economies of scale for U.S. firms producing electric power
Comparison between 1955 and 1970 using cross sectional data
Data analyzed using a translog cost function
The paper adds and compares results to the pioneering work on the subject done by Marc Nerlove(1963)
1955 sales to ultimate consumers: 369 billion kWh
1970 sales to ultimate consumers: 1,085 billion kWh
Number of firms declined slightly, so output per firm increased threefold!
Technology allowed firms to expand to exploit scale economies or rapid expansion has exhausted economies of scale??
Need for current econometric analysis.
to all prices increasing by factor, holding
Demand function for production factors (Shephard’s Lemma!)
Cost Share of ith-factor input
Allen partial elasticities of substitution
Own-price elasticity of demand for ith factor of production
Scale Economies (1-elasticity of total cost with respect to output)
*positive = scale economies , negative = scale diseconomies
*natural interpretation in percentage terms
Model A: Translog Function
Model B: Translog with homotheticity restriction
Model C: Translog with homogeneity restriction
Model D: Translog with unitary elasticity restriction
Model E: Translog with homotheticityand unitary elasticity restrictions
Model F: Translogwith homogeneity and unitary elasticity restrictions
1955: scale economies available to most firms
1970: majority of electricity generation operating on flat portion of average cost curve
Great scale economies at low levels of output, but average cost curves flatten out at relatively moderate firm size
A small number of very large firms not required for optimal exploitation of scale economies
Policies designed to promote competition in generation cannot be faulted in terms of sacrificing scale economies