The purpose of this paper is to analyze the impacts of efficiency and returns to scale on the reduction in the unit cost for dairy farms in Japan using a nonparametric programming approach.
　The overall cost efficiency measure (the ratio of minimum unit cost to actual unit cost given constant returns to scale (CRS) technology) is decomposed into two components: (1) the weak cost efficiency measure (the ratio of minimum unit cost to actual unit cost given variable returns to scale (VRS) technology); (2) the scale efficiency measure (which was designed to measure cost slack due to deviation from optimal scale, i.e., from CRS). This approach has the advantage that no a priori assumption on the analytic form of the frontier cost function is required. Linear programming techniques are used in calculating these efficiency measures for the sample of dairy farms in Japan during the year 1985.
　The empirical results in this study can be summarized as follows. First, the major sources of the overall cost inefficiency are not due to scale inefficiency but to weak cost inefficiency. More than half of the farms in the sample exhibit increasing returns to scale technology. Second, the correlation analysis indicates that herd size, farm income per cow, milk production per cow, milk production per working hours and the management proxy (margin over feed per milk production) has a positive influence on cost efficiency.
　These findings indicate that improvements in the planning and control of farm management for a given business size are more important than the expansion of business size in order to reduce the unit cost for dairy farms in Japan.

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