ELLERTHORPE, SARAH An Estimation of the Production Function of Water Utilities
in the United States. Department of Economics, June 2017.
ADVISOR: J. Douglass Klein
In modern society, water utilities typically make headlines for drinking water violations. As a result, the “behind the scenes” factors – the physical inputs and characteristic variables – that allow utilities to operate on a daily basis are often overlooked. The purpose of this thesis is to identify a number of these “behind the scenes” factors and estimate their effect on the productive efficiency of US water utilities. Previous studies have evaluated the efficiency of water and combined utilities, and a number of them have done so with respect to management structure (public vs. private), but there is no general consensus on utility efficiency levels or which management structure is more efficient.
This thesis estimates a production function of US water utilities using American Water Works Association (AWWA) data to identify variables that significantly affect output when output is measured by average annual production and total population served. The findings indicate: 1) management structure does not significantly affect utility efficiency, 2) water service staff size and production capacity positively affect average annual production, 3) water service staff size, production capacity and wholesale water service(s) positively impact total population served, 4) when output is measured by average annual production, productive efficiency increases with capacity utilization, but at a decreasing rate, 5) when output is measured by total population served, productive efficiency increases with capacity utilization, 6) there may be economies of scope with combined water and wastewater service, and 7) there may be economies of scale from providing wholesale water service(s).