Cost Structure and Economies of Scale in German Water Supply

34 Pages Posted: 21 May 2016

See all articles by Michael Zschille

Michael Zschille

German Institute for Economic Research (DIW Berlin)

Date Written: May 2016

Abstract

Potable water supply in Germany is highly fragmented. A consolidation of the industry could, therefore, lead to lower cost of water supply and price savings for the customers. In this paper we estimate a total cost function for potable water supply based on a unique sample of German water utilities observed between 2004 and 2010. Newly available data allows for a detailed cost modeling approach. Capital stocks are estimated using the Perpetual Inventory Method, while capital costs are estimated using a weighted cost of capital approach. Local water suppliers are found to have strong cost advantages compared to regional suppliers. While the results indicate strong density effects, economies of scale are only found for the smallest water utilities. Thus, the results argue against a consolidation of the industry.

Keywords: Water supply, cost function, economies of scale, seemingly unrelated regression

JEL Classification: C14, L22, L95, Q25

Suggested Citation

Zschille, Michael, Cost Structure and Economies of Scale in German Water Supply (May 2016). DIW Berlin Discussion Paper No. 1576, Available at SSRN: https://ssrn.com/abstract=2782387 or http://dx.doi.org/10.2139/ssrn.2782387

Michael Zschille (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
109
Abstract Views
681
Rank
451,035
PlumX Metrics