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Reminiscences of “Returns to Scale in Electricity Supply”

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Handbook of Production Economics

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Abstract

The origins and further development of a very early empirical application of Shephard’s duality theorem is discussed. The investigation of the “Returns to Scale in Electricity Supply” was based on a cost function derived from a Cobb-Douglas production function initially. The function was modified to allow for variable “returns to scale.” Duality between cost and production then showed the modified Cobb-Douglas production function behind the cost function which was initially estimated.

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Notes

  1. 1.

    Technical Report No, 96, May 25, 1961, of the Institute for Mathematical Studies in the Social Sciences, Stanford University.

  2. 2.

    Carl F. Christ [1]

  3. 3.

    Zellner [2]

  4. 4.

    Berndt [3]

  5. 5.

    Hayashi [4]

  6. 6.

    Christensen and Greene [5]. “Cross-section data for 1955 and 1970 are analyzed using the translog cost function. We find that in 1955 there were significant scale economies available to nearly all firms. By 1970, however, the bulk of U.S. electricity generation was by firms operating in the essentially flat area of the average cost curve. We conclude that a small number of extremely large firms are not required for efficient production and that policies designed to promote competition in electric power generation cannot be faulted in terms of sacrificing economies of scale” (p. 655).

  7. 7.

    Shephard [6]

  8. 8.

    He was the grandson of the famous lawyer for the defense in the Triangle Shirtwaist Factory Fire case – in case you wanted to know. Steuer, Max David [7].

  9. 9.

    US Federal Power Commission, Steam Electric Plants, Construction Costs and: Construction Costs and Annual Production Expenses, Washington, D.C.: annually; and Statistics of Electric Utilities in the United States, Classes A and B Privately Owned Companies, Washington, D.C.: annually.

  10. 10.

    Allen [8]. I am indebted to Sara Seten Berghausen, Associate Curator of Collections. David M. Rubenstein Rare Book & Manuscript Library, who retrieved my class notes and exercises for my course at Hopkins.

  11. 11.

    Nerlove [9]

  12. 12.

    Klein [10]. This paper is briefly summarized in Klein [11]. There is a more extensive discussion in Nerlove, op. cit., Chap. 4, pp. 61–85.

  13. 13.

    Chipman [12]

  14. 14.

    See Nerlove [9], loc. cit., pp. 78–79, for a more precise exposition of what Klein does. I also argue there that Klein’s estimates of returns to scale are neither unbiased nor consistent.

  15. 15.

    See Nerlove [9], loc. cit., pp. 80–81.

  16. 16.

    Chipman, op. cit.

  17. 17.

    Hasenkamp [13, 14].

  18. 18.

    McFadden [15]. Much of the core of this dissertation was later published as McFadden [16], in which McFadden generalizes the elasticity of substitution for the multifactor case.

  19. 19.

    Uzawa [17]

  20. 20.

    Arrow et al. [18]

  21. 21.

    Uzawa [19]

  22. 22.

    Christensen et al. [20]; Diewert [21]

  23. 23.

    Fuss and McFadden [22]

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Author information

Authors and Affiliations

  1. Department of Agricultural and Resource Economics, College of Agriculture and Natural Resources, University of Maryland, College Park, MD, USA

    Marc Nerlove

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  1. Marc Nerlove
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Correspondence to Marc Nerlove .

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Editors and Affiliations

  1. Department of Economics, University of Connecticut, Storrs, CT, USA

    Subhash C. Ray

  2. Department of Agricultural and Resource Economics, University of Maryland, College Park, MD, USA

    Robert G. Chambers

  3. Department of Economics, Binghamton University, Binghamton, NY, USA

    Subal C. Kumbhakar

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Nerlove, M. (2022). Reminiscences of “Returns to Scale in Electricity Supply”. In: Ray, S.C., Chambers, R.G., Kumbhakar, S.C. (eds) Handbook of Production Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-3455-8_2

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