Economies-of-Scale Analysis in State and Local Government

by Daniel J. Alesch, L. A. Dougharty

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An introduction to basic concepts used in economies-of-scale analysis — how and why economies of scale are relevant, methods of analysis, and potential difficulties in application. Economies of scale exist when increased size of production capacity results in lower unit costs. Economies-of-scale analysis requires a comparison of the costs and output of facilities (organizations, plants) of various sizes to learn whether unit costs of production and size are related. This method of analysis can be applied to numerous public service areas with the prospect that policy-relevant information can be generated. The analysis is more easily applied to public service areas where (1) the product is standardized or well-defined, (2) the resources required to produce the product are well-defined, and (3) there is a broad range of sizes of facilities and organizations providing the service to supply sufficient data points for analysis. The limitations of data constitute the primary obstacle to definitive economies-of-scale studies. (See also R-739.)

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