The Structure of Bulk Water Supply Costs in Japan : a Hedonic Cost Function Approach

Abstract

There are four types of water supply systems in Japan such as large water supply systems, small water supply systems, bulk water supply systems and small private water supply systems. While water supply systems have at least three activities such as water intake, water purification and water delivery, the only bulk water supply systems don't have water delivery but have water intake and water purification. Bulk water supply systems are owned by prefecture or water supply authority which is established by some local governments, so bulk water supply systems therefore are thought of as they aim to increase productivity of water intake and water purification activities through widespread coordination.
The purpose of this study is to analyze the cost structures of bulk water supply systems. The process of this analysis is as follows: (1) estimate the translog cost function and adopt hedonic output specification which contains some product quality variables, (2) include network variable in the cost model and identify economy of density and economy of scale. We obtain the results that some product quality variables have positive impacts to the cost structure and economy of density does exist (1.685) whereas economy of scale shows a constant return to scale (1.020) at the sample mean point.

JEL classification: L95, L11