An Examination of the Effect of Ownership on the Relative Efficiency of Public and Private Water Utilities

Abstract

The behavior of privately and publicly owned water utilities is examined by estimating a generalized variable cost function containing the regular characteristics of the neoclassical cost function without requiring that cost minimization subject to market prices be imposed as a maintained hypothesis. Assuming that unobserved shadow prices reflect the regulatory environment of the water industry, tests for cost minimization are obtained by deriving shadow prices as functions of market prices. The empirical results provide evidence that public water utilities are more efficient than private utilities on average, but are more widely dispersed between best and worst practice.