Cost efficiency and scale economies of Japanese water utility: short-run cost function approach

Abstract

　The efficient management of water utilities is a key issue in Japan, where the population is declining. This study examines the existence of cost inefficiencies and economies of scale in Japan's water utilities using the short-run cost function approach with stochastic frontier analysis. The results of this study confirm that cost inefficiencies exist in Japan's water utilities, suggesting that Japan's water utilities could be managed more efficiently. The study also confirms that economies of scale exist in Japan's water utilities. Further, it suggests that smaller water utilities in particular are likely to benefit from economies of scale by expanding their service areas. However, it may be necessary to devise a way to prevent an increase in the fixed asset amount when expanding the area.