Economies of Scale: Some Statistical Evidence: Comment

Abstract

As engineers, working in the field of chemical economics, we appreciate Moore's analysis of the dubious statistical evidence behind the so-called power-rule relating size and cost.' However, we believe that more can and should be said about the matter. The fact is that in every case of our experience in the chemical and petroleum industries, large plants can be built at a lower unit cost than smaller ones. There are probably real cases outside of our experience where this rule does not hold. We can postulate conditions where it would not hold. But practically, these exceptions do not seem to be significant. Various reasons may be brought up as to why large plants cost less per unit of potential productive capacity than smaller ones (such as the surface area-volume relationship mentioned by Womer)?2 But these are only limited explanations, rather than proofs. There are obvious difficulties in defining or circumscribing both plant and Even if the terms could be circumscribed to some extent, the cost of a is a summation of many components so diverse that to expect them to follow the same mechanics would be absurd. Finally, the rule obviously fails at some high limit of capacity. In the face of these difficulties, one must conclude that any relationship between capacity and cost would be empirical, limited and highly approximate. The so-called power rule relationship C = KSn with C the cost, S the size and n an integer between zero and one, is a simple way of expressing the gross fact that large plants are built at lower unit cost. There are certainly more complex relationships which describe the fact more suitably; however, theory and data are insufficient to tell us what they are.3 But if the simple power rule relationship is to be used, its limitations must be clearly understood. The following example may assist such an understanding.