Marginal Cost Estimates Research Articles

Reimbursing for the costs of teaching and research in finnish hospitals: A stochastic frontier analysis

In this study stochastic frontier cost function was used to estimate the teaching and research costs of Finnish hospitals. Predicted efficiency adjusted costs were calculated and compared to evaluate the current level of teaching and research reimbursement. The efficiency adjustment had significant impact on the marginal and average cost estimates of the teaching and research output. The results suggest that the average rate of teaching and research reimbursement should be approximately 14.6% of the total operating costs in university teaching hospitals. The main finding was that the university teaching hospitals were underfunded with respect to both research and teaching output.

On the Workings of a Cartel: Evidence from the Norwegian Cement Industry

Using data on prices, production, and exports, we are able to identify marginal costs as well as the effectiveness of the Norwegian cement industry cartel. We find that our marginal cost estimates are very much in line with the detailed cost accounting data. We show that the cement cartel has been ineffective because the sharing rule induces “overproduction” and exporting below marginal costs. It is consumers — not firms — who benefit from the sharing rule. The ineffectiveness of the cartel was becoming so large that domestic welfare of a merger to monopoly would be positive around 1968, which is when the merger actually took place! We also show that competition would have resulted in even higher welfare gains over the entire sample.

Electricity tariffs based on long-run marginal costs for central grid system of Oman

The electricity tariffs in Oman are subsidized and are based on a cost accounting approach and do not reflect the true cost incurred in generating, transmitting and distributing a kilowatt-hour of electricity at the consumer end. This paper presents the electricity tariff based on the estimation of long-run marginal cost at generation, 33 kV, and 415 voltage level for Ministry of Housing, Electricity & Water (MHEW) interconnected power system of Oman. The result shows that at the generation level a marginal kW costs US$ 75 per year and a marginal kWh costs 2.07 ¢/kWh. These costs increase as we move downstream from generation to consumer end. The average cost of electricity at the consumer end connected at 415 V is 6.52 ¢/kWh or 25.17 Bz/kWh.

Marginal Cost of Emergency Department Outpatient Visits

We sought to clarify the importance of time frame in the measurement of marginal cost and to provide marginal cost estimates for outpatient emergency department (ED) visits that better reflect current economic conditions. Analyses are based upon data that California hospitals report to the Office of Statewide Health Planning and Development (OSHPD). The time period covered was 1990 through 1998. Hospitals without EDs, or hospitals designated as trauma centers, were excluded from the analysis. Nine years of panel data were used to estimate hospital cost functions, which were then used to test for economies of scale and to derive estimates of both short- and long-run marginal costs (excluding the physician expense component). We found only weak evidence in favor of scale economies and, in that context, we argue that long-run marginal costs should be the preferred metric for judging the cost of treating outpatient ED visitors. We estimate these long-run costs (in 1998 dollars) to be roughly 348 dollars per visit for large urban hospitals, 288 dollars for other urban hospitals, 203 dollars for rural hospitals, and 314 dollars overall. Our results suggest that the marginal cost of an outpatient ED visit is larger than is commonly believed. A key implication of this finding is that hospital administrators need to think more carefully about their nonurgent care policies, especially as they pertain to ED operations.

Bus Rapid Transit and Light Rail

A parametric cost model was developed to provide both average and marginal cost estimates and to compare annual operating costs for light rail transit (LRT) and bus rapid transit (BRT) under an assumption of additional peak service on weekdays. The model uses readily available data from the U.S. National Transit Database. For illustrative purposes, it is applied to a hypothetical service network simulating universal coverage of a medium-sized metropolitan area with either LRT or BRT operating on trunk lines. The Dallas [Texas] Area Rapid Transit agency is selected for a computational example because it has representative, contemporary performance statistics for both LRT and bus. High and low operating cost estimates based on articulated buses were used for BRT because of a lack of an operational history. For an agency with a similar cost structure to the Dallas agency, both BRT and LRT have lower operating costs on a per space kilometer basis during base periods than do regular buses. Both LRT and the lower BRT cost estimates are comparable for adding service during peak periods. With the higher cost estimate, peak BRT costs 24% more than LRT. For trunk line capacities below about 1,600 spaces per hour, the headway-versus-cost trade-off favors BRT. Above 2,000 spaces per hour, BRT headways become so short that traffic signal priority may not be effective and revenue speed may decrease. The marginal cost of adding off-peak BRT service is substantially less than the average cost of regular buses, and the cost of LRT is even less. Peak fleet size seems to be an important driver of costs. Research methods to verify this are suggested.

Bus Rapid Transit and Light Rail: Comparing Operating Costs with a Parametric Cost Model

A parametric cost model was developed to provide both average and marginal cost estimates and to compare annual operating costs for light rail transit (LRT) and bus rapid transit (BRT) under an assumption of additional peak service on weekdays. The model uses readily available data from the U.S. National Transit Database. For illustrative purposes, it is applied to a hypothetical service network simulating universal coverage of a medium-sized metropolitan area with either LRT or BRT operating on trunk lines. The Dallas [Texas] Area Rapid Transit agency is selected for a computational example because it has representative, contemporary performance statistics for both LRT and bus. High and low operating cost estimates based on articulated buses were used for BRT because of a lack of an operational history. For an agency with a similar cost structure to the Dallas agency, both BRT and LRT have lower operating costs on a per space kilometer basis during base periods than do regular buses. Both LRT and the lower BRT cost estimates are comparable for adding service during peak periods. With the higher cost estimate, peak BRT costs 24% more than LRT. For trunk line capacities below about 1,600 spaces per hour, the headway-versus-cost trade-off favors BRT. Above 2,000 spaces per hour, BRT headways become so short that traffic signal priority may not be effective and revenue speed may decrease. The marginal cost of adding off-peak BRT service is substantially less than the average cost of regular buses, and the cost of LRT is even less. Peak fleet size seems to be an important driver of costs. Research methods to verify this are suggested.

A multi-product continuous review inventory system with stochastic demand, backorders, and a budget constraint

Common characteristics of inventory systems include uncertain demand and restrictions such as budgetary or storage space constraints. Several authors have examined budget constrained multi-item stochastic inventory systems controlled by continuous review policies without considering marginal shortage costs. Existing models assume that purchasing costs are paid at the time an order is placed, which is not always the case since in some systems purchasing costs are paid when orders arrive. In the latter case the maximum investment in inventory is random since the inventory level when an order arrives is a random variable. Hence payment of purchasing costs on delivery yields a stochastic budget constraint for inventory. This paper models a multi-item stochastic inventory system with backordered shortages when estimation of marginal backorder cost is available, and payment is due upon order arrival. The budget constraint can easily be converted into a storage constraint.

Economic analysis of targeting chemotherapy (CT) using a 21 gene RT-PCR assay in lymph node negative (LN-), estrogen receptor positive (ER+) early-stage breast cancer (ESBC)

6036 Background: Guidelines for LN-, ER+ adjuvant therapy stratify women into risk categories to optimize decisions concerning adjuvant CT use. A 21 gene RT-PCR assay, Oncotype DX™ Recurrence Score (RS), has been prospectively validated as a predictor of distant recurrence-free survival (DRFS) in the NSABP B-14 study of 668 evaluable LN-, ER+ patients receiving tamoxifen (Paik et al, SABCS 2003). The economic impact of using the RS to guide CT decision-making has not been assessed. Methods: The primary analysis was between (1) No RS Testing and CT if high risk based on NCCN criteria versus (2) RS Testing and CT based on Recurrence Score estimates of 10 yr DRFS. Using estimates of CT efficacy from NSABP B-20, and cancer care costs from CMS and literature, we calculated marginal (added) costs ($), efficacy (life-yrs) and cost-effectiveness (C/E; cost per life-yr gained). Results: Using NCCN criteria, 53 pts (8%) of the 668 pts would be classified as low risk with a 10-yr DRFS of 0.93 (95% CI, 0.86, 1.00). 28% of low risk patients by NCCN criteria would be reclassified to moderate or high risk by the RS. For low risk patients currently not receiving CT, recommending CT based on the Recurrence Score is predicted to increase mean 10-yr DRFS by 0.25 yrs. Using the Recurrence Score as a continuous function to identify the high-risk patients by NCCN that would be reclassified as lower risk, various RS cut-off points were evaluated. For example, model comparisons of treatment based on NCCN criteria versus RS criteria (e.g., RS<10) provide estimates of marginal costs: $1716; effectiveness: 0.6 year; and C/E: $3102/life-yr gained. For pts reclassified by RS as low risk, foregoing CT is also predicted to result in improved quality-adjusted survival. Conclusions: The Recurrence Score assay is a valid prognostic tool in selecting patients for more effective and C/E treatment strategies. The C/E of the RS assay for targeting the addition of adjuvant CT in LN-, ER+ ESBC is well within accepted ranges for healthcare technologies. Author Disclosure Employment or Leadership Consultant or Advisory Stock Ownership Honoraria Research Funding Expert Testimony Other Remuneration Acumen, LLC Genomic Health, Inc.

Economic analysis of targeting chemotherapy (CT) using a 21 gene RT-PCR assay in lymph node negative (LN-), estrogen receptor positive (ER+) early-stage breast cancer (ESBC)

6036 Background: Guidelines for LN-, ER+ adjuvant therapy stratify women into risk categories to optimize decisions concerning adjuvant CT use. A 21 gene RT-PCR assay, Oncotype DX™ Recurrence Score (RS), has been prospectively validated as a predictor of distant recurrence-free survival (DRFS) in the NSABP B-14 study of 668 evaluable LN-, ER+ patients receiving tamoxifen (Paik et al, SABCS 2003). The economic impact of using the RS to guide CT decision-making has not been assessed. Methods: The primary analysis was between (1) No RS Testing and CT if high risk based on NCCN criteria versus (2) RS Testing and CT based on Recurrence Score estimates of 10 yr DRFS. Using estimates of CT efficacy from NSABP B-20, and cancer care costs from CMS and literature, we calculated marginal (added) costs ($), efficacy (life-yrs) and cost-effectiveness (C/E; cost per life-yr gained). Results: Using NCCN criteria, 53 pts (8%) of the 668 pts would be classified as low risk with a 10-yr DRFS of 0.93 (95% CI, 0.86, 1.00). 28% of low risk patients by NCCN criteria would be reclassified to moderate or high risk by the RS. For low risk patients currently not receiving CT, recommending CT based on the Recurrence Score is predicted to increase mean 10-yr DRFS by 0.25 yrs. Using the Recurrence Score as a continuous function to identify the high-risk patients by NCCN that would be reclassified as lower risk, various RS cut-off points were evaluated. For example, model comparisons of treatment based on NCCN criteria versus RS criteria (e.g., RS<10) provide estimates of marginal costs: $1716; effectiveness: 0.6 year; and C/E: $3102/life-yr gained. For pts reclassified by RS as low risk, foregoing CT is also predicted to result in improved quality-adjusted survival. Conclusions: The Recurrence Score assay is a valid prognostic tool in selecting patients for more effective and C/E treatment strategies. The C/E of the RS assay for targeting the addition of adjuvant CT in LN-, ER+ ESBC is well within accepted ranges for healthcare technologies. Author Disclosure Employment or Leadership Consultant or Advisory Stock Ownership Honoraria Research Funding Expert Testimony Other Remuneration Acumen, LLC Genomic Health, Inc.

How costly are carbon offsets? A meta-analysis of carbon forest sinks

Carbon terrestrial sinks are seen as a low-cost alternative to fuel switching and reduced fossil fuel use for lowering atmospheric CO2. As a result of agreements reached at Bonn and Marrakech, carbon offsets have taken on much greater importance in meeting Kyoto targets for the first commitment period. In this study, meta-regression analysis is used to examine 981 estimates from 55 studies of the costs of creating carbon offsets using forestry. Baseline estimates of costs of sequestering carbon through forest conservation are US$ 46.62–US$ 260.29/t C ($12.71–$70.99/t CO2). Tree planting and agroforestry activities increase costs by more than 200%. When post-harvest storage of carbon in wood products, or substitution of biomas for fossil fuels in energy production, are taken into account, costs are lowest – some $12.53–$68.44/t C ($3.42–$18.67/t CO2). Average costs are greater, between $116.76 and $1406.60/t C ($31.84–$383.62/t CO2), when appropriate account is taken of the opportunity costs of land. Peer review of the studies increases costs by a factor or 10 or more, depending on the model. The use of marginal cost estimates instead of average cost results in much higher costs for carbon sequestration, in the range of thousands of dollars per t C, although few studies used this method of cost assessment.

Cost-Effectiveness of Pap Smear Screening for Vaginal Cancer After Total Hysterectomy for Benign Disease

Obstetrical & Gynecological Survey: November 2003 - Volume 58 - Issue 11 - p 725-726 doi: 10.1097/01.OGX.0000093675.28158.4A

Price-Directed Replenishment of Subsets: Methodology and Its Application to Inventory Routing

The idea of price-directed control is to use an operating policy that exploits optimal dual prices from a mathematical programming relaxation of the underlying control problem. We apply it to the problem of replenishing inventory to subsets of products/locations, such as in the distribution of industrial gases, so as to minimize long-run time average replenishment costs. Given a marginal value for each product/location, whenever there is a stockout the dispatcher compares the total value of each feasible replenishment with its cost, and chooses one that maximizes the surplus. We derive this operating policy using a linear functional approximation to the optimal value function of a semi-Markov decision process on continuous spaces. This approximation also leads to a math program whose optimal dual prices yield values and whose optimal objective value gives a lower bound on system performance. We use duality theory to show that optimal prices satisfy several structural properties and can be interpreted as estimates of lowest achievable marginal costs. On real-world instances, the price-directed policy achieves superior, near optimal performance as compared with other approaches.

Electric infrastructure failures in Nigeria: a survey-based analysis of the costs and adjustment responses

This paper examines the cost of electricity shortages on the Nigerian manufacturing sector. Utilizing the data obtained from a 1998 nationwide survey, the paper details the various costs from power outages and examines the response of manufacturers to the infrastructure problem. The findings of the study confirm that the cost of electricity failures on the Nigerian manufacturing sector is quite high. Firms incur huge costs on the provision of expensive back-up to minimise the expected outage costs. The average costs of this back-up are on the average 3 times the cost of publicly supplied electricity. The marginal cost estimates also indicate that the cost of kWh of unserved electricity in Nigeria is very high. Small-scale firms bear the greater proportion of the cost of the power failure. A situation where firms spend as much as 20–30% of initial investment on the acquisition of facilities to enhance electricity supply reliability has a significant negative impact on costs competitiveness of the manufacturing sector. Thus, the study supports current government efforts to privatise the public monopoly and liberalizes the electricity market. These hopefully will mitigate the burden of poor power supply as well as introduce the needed competition into the electricity market in the country.

New Keynesian Phillips Curves: A Reassessment Using Euro-Area Data

Using euro-area data, we re-examine the empirical success of New Keynesian Phillips Curves (NKPCs). The nature of our re-evaluation relies on the actual empirical underpinnings of such estimates: we find existing estimates un-robust and – given that key parameters are generally calibrated rather than estimated – potentially at odds with the data. We re-estimate with a wellspecified optimizing supply-side (which attempts to treat non-stationarity in factor income shares and mark-ups) and this allows us to derive estimates of technology parameters and marginal costs. Our resulting estimates of the euro-area NKPCs are robust, provide reasonable estimates for fixed-price durations and discount rates and embody plausible dynamic properties. Our method for identifying and estimating New Keynesian Phillips curves has general applicability to a wide set of countries and might also be used in identifying sectoral NKPCs. JEL Classification: E31

Strategic Behavior in Whiskey Distilling, 1887–1895

This article shows that the Whiskey Trust used exclusive dealing and unusually low prices to deter entry and competition. Evidence of this is based on a unique dataset that allows us to estimate a firm-level demand curve for the trust, and to construct direct estimates of marginal cost. This article also shows that the strategies employed by the trust failed to deter entry. Market structure and state-level antitrust enforcement account for the failure of these strategies.

Enhancing Supply Decisions through the Use of Efficient Marginal Costs Models

SUMMARYSupply managers are often faced with the challenge of making effective purchasing decisions in acquiring production materials, supplies, and capital equipment. The complexity of the procurement process has mainly intensified due to the increased emphasis on delivery performance, product quality, and technical service apart from traditional cost measures This article presents a set of multi‐criteria models for estimation of efficient marginal costs of supplier outputs, which provide critical information to managers on the values of outputs. The marginal costs are utllized for making effective purchasing decisions by setting optimal output prices for negotiation on supplier bids. The models are tested on an actual dataset of suppliers.

The use of goal programming, regression analysis and data envelopment analysis for estimating efficient marginal costs of hospital services

AbstractThis paper presents a new composite methodology for estimating efficient marginal costs of outputs. The methodology is based on multi‐criteria methods involving Data Envelopment Analysis (DEA), Goal Programming (GP) and Regression Analysis (RA) techniques. Firstly, DEA is used to find an empirical frontier onto which each observed dependent variable (cost) is projected. Then GP or RA is applied to the projected data set to yield the parameter estimates of a cost function. That is, firstly, the amounts of technical inefficiency are removed and then the cost function is estimated. The parameters of the cost function provide the efficient marginal costs of outputs. The filtering of the data can be made by means of DEA as it yields target values with frontier rather than average behaviour. The results clearly indicate the superiority of the combination of DEA and GP over the combination of DEA and RA. The methodology was applied to estimate the efficient marginal costs of hospital services (inpatient days, outpatient visits, ancillary services) of public general hospitals in Greece. Concluding, the analysis proves that the estimation of efficient marginal costs of outputs is in author's view particularly useful for hospitals, and can serve as a theoretical basis for determining the prices of different hospital services. Copyright © 2003 John Wiley &amp; Sons, Ltd.

Optimal pricing in railway passenger transport: theory and practice in The Netherlands

This study tries to establish the link between the well-developed economic theory of optimal pricing, and recent empirical results concerning price elasticities of demand and marginal cost estimates for The Netherlands Railways. The ex post determination of Ramsey coefficients confirms that peak hour pricing is dominated by the aim of welfare maximization, while off-peak fares largely correspond to the profit-maximizing objective. It is argued that tariff differentiation according to track offers scope for a budget-neutral welfare improvement, and that a price-elastic off-peak market implies that lower off-peak fares result in a Pareto-improvement.

Estimating Marginal Abatement Costs of SPM: An Applicaiton to the Thermal Power Sector in India

This paper provides estimates of firm specific marginal abatement costs of suspended particulate matters (SPM) for the thermal power sector in India. To derive these costs, the duality of the output distance function and the revenue function is used. This study uses the output distance function framework to estimate marginal abatement costs or shadow prices of the pollutant for individual plants. The average shadow price in 1991-92 of SPM emissions for 33 thermal power plants in India has been estimated to be 145 rupees per kilogram. This figure can be used for designing market-based instruments for controlling pollution in the thermal power sector in India since there is wide variation in the shadow prices across the plants. Moreover, this study also finds that switching to lower ash content coal has more cost advantages for controlling pollution in the Indian thermal power sector.

Greek hospitals: how well their resources are used

The paper concerns the use of different estimation methods (parametric and non-parametric), jointly or individually, as means of ascertaining relative efficiency, as well as specific estimates of the efficient marginal costs of hospital services (inpatient days in medical care, inpatient days in surgical area, etc.) of public, general and teaching hospitals in Greece. In addition, the efficient cost of hospitals is estimated and compared with the actual cost. The estimation of efficient marginal cost of outputs is particularly useful for hospitals, and can serve as a theoretical basis for determining the prices of different hospital services. The study came to the following conclusions, among others: there are potential savings of up to 20% on hospital spending; the difference between the actual and efficient cost is 27% for general hospitals and 16% for teaching hospitals; non-efficient hospitals could produce the same result, if the daily cost per patient was reduced by 26%. The results, also, indicated that at least 4.1% of health care costs in the gross domestic product are due to inefficiencies created by public, general and teaching hospitals.