The Feasibility of Economies-of-Scale Analysis of Public Services

by Daniel J. Alesch, L. A. Dougharty

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Economies-of-scale analysis can be applied to analyze the various relationships between the size of an organization or facility and the unit costs of producing goods and services. This kind of analysis also takes into account differences in the quality of the product and variables other than size that affect production costs. It is important to government because it can help to save tax dollars. It can provide decisionmakers with information about (1) the sizes of facilities that are least efficient, (2) the range of sizes within which costs do not vary appreciably, and (3) the magnitude of potential savings that might be achieved through economies of scale. Evidence from previous research and demonstration studies indicates that it is feasible to apply the method to most public services, although the costs of generating comparable results may vary. Suggested areas for studies are solid waste disposal, public assistance, education, and police and fire services.

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