An inquiry into the cost structure of state transport undertakings in India

Abstract

This paper examines the cost structure particularly cost elasticities, returns to scale, marginal cost of production, technological progress, demand for factor of production, and factor substitution in publicly owned State Transport Undertakings (STUs) in India. To examine these issues, a translog cost function is estimated jointly with factor share equations subject to required coefficient restrictions by using the method of ‘Zellner’s iterative’ technique using the annual data of 11 STUs from 2000–01 to 2010–11. We find that the cost function is fully separable between time (technology) and its other arguments; therefore, technological progress experienced by STUs is (Hicks) neutral and returns to scale depends on output alone. Further analysis reveals that the average cost curve for STUs is U-shaped and it is increasing for the mean firm; consequently, large and medium size STUs are operating on diseconomies of scale whereas relatively small size STUs are experiencing economies of scale. We also examined the technological progress that STUs have enjoyed over time. It is found that the technological progress is same across STUs, though diminishing over time. STUs’ cost savings due to technological progress has reduced from 2.1% of the total cost in 2000–01 to 1.3% of the total cost in 2010–11. Finally, we analyzed price elasticities of input demand and elasticity of substitution. It is found that all input demands are price inelastic and cross-price effect is not very strong. Since all own-partial elasticities of substitution are negative, hence, as required, the postulates of the cost minimizing factor demand theory are satisfied.