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SUBSIDIES AND INEFFICIENCY: STOCHASTIC FRONTIER APPROACH
Author(s) -
SAKANO RYOICHI,
OBENG KOFI,
AZAM G.
Publication year - 1997
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1997.tb00483.x
Subject(s) - allocative efficiency , subsidy , economics , inefficiency , microeconomics , capital (architecture) , production–possibility frontier , market economy , archaeology , history
U.S. urban transit systems receive operating and capital subsidies from various levels of government. Each firm minimizes its cost net of subsidies subject to its production function. The first order conditions from this minimization give a set of equations that are estimated using a stochastic frontier approach. From the results are calculated technical and allocative inefficiencies. The allocative inefficiencies are further decomposed among two sources, subsidies and factors internal to the firm. The analysis reveals large allocative inefficiencies between labor, fuel, and capital. Furthermore, it finds that subsidies lead to excess use of labor relative to capital and excess use of fuel relative to capital and labor. Also, most allocative inefficiencies in firms are due to internal factors and not subsidies, and the sizes of the inefficiencies vary substantially among transit firms.