Costs Economies of Scale and Factor Demand in Urban Bus Transport. An Analysis of Municipal Transport Undertakings in India

Abstract

This article reports on a study of the cost structure and cost elasticities, economies of scale, demand for factor of production, and factor substitution in Municipal Transport Undertakings (MTUs, bus transport companies) in India. The author estimated a translog cost function using the data of seven major MTUs for which consistent data are available from 1990-1991 and 2001-2002. The author found that the average cost curve for MTUs is U-shaped and it is decreasing for the mean firm. That is, the typical firm operating at the sample mean of the variables is subject to economies of scale. Analysis of returns to scale experienced by each firm during recent years of the sample period indicates that all MTUs are operating on economies of scale. The author notes that economies of scale is increasing over time. Thus, merger of different firms operating in the same city would be desirable in terms of cost savings since a single, larger firm could exploit economies of scale more effectively. The author also found that all of the MTUs experienced technological regress during recent years; this problem is more pronounced for smaller firms than for larger firms. Finally, the author reports that all input demands are price inelastic and the cross-price effect is very weak.