An Analysis of Cost Structure Process of Water Supply(The Case Study of Shiraz Water and Wastewater Company)

Document Type : Research Paper


1 Assist. Prof. of Economy, Shiraz University

2 Ph.D. Student of Economic Sciences, Shiraz University, Shiraz


The main purpose of this paper is examination of return to scale index and economics of scale index that is an argument of being natural monopoly, also investigation on states of technical changes and productivity growth rate in Shiraz water and wastewater company. This is the reason translog cost function is used to estimate the cost function of the water supply in this company. The framework of analysis is in accordance to the iterative seemingly unrelated regression (ISUR) technique. To estimate the parameters of the cost function we have used the quarterly data for the period of 1999-2006 has been used. This company uses four factors of production in its process: labor, capital, raw material and other services. The result showed that there exists decreasing return to scale and no economizing of scale that rejects the existence of natural monopoly in this company. Advance technology index indicated cost decrease as a result of advance in technology and calculation index of productivity growth showed the existence of productivity growth during the surveyed period of time.  


1- Baumol, W.J., Bailey, E.E., and Willig, R.D. (1977). “Weak invisible hand theorems on the sustainability of multiproduct natural monopoly.” American J. of Economic Review, 67, 350-365.
2- Martinez-Espineira, R. (2000). “Residential water demand in the northwest of Spain.” < http: //www.soc /calendar/2000EAERE /papers/PDF/d1-espineira .pdf> (March 28, 2007).
3- Garcia, S., and Reynaud, A. (2004). “ Estimating the benefit of efficient in France.” J. of Resource and Energy Economics, 26, 1-25.
4- Urakami, T. (2004). “The effect of subsidies on the cost structure of Japanese water supply organization.” <http://ideas wiwersa /ersa04p260. html > (Feb. 25, 2007).
5- Coelho Faria, R., Da Silva Souza, G., and Belchior Moreira, T. (2005). “Public versus private water utilities: Empirical evidence for Brazilian companies.” J. of Economics Bulletin, 8, 1-7.
6- Martins, R., and Fortunato, A., and Coelho, F. (2006). “Cost structure of the Portuguese water industry: A cubic cost function application.” < http:// gemf. Fe. Uc. Pt> (July 8, 2008).
7- Kostas, B., and Chrysostomos, S. (2006). “Estimating urban residential water demand determinants and forecasting water demand for Athens metropolitan area, 2000-2010. South-Eastern Europe J. of Economics, 1, 47-59.
8- Nauges, C., and Van den Berg, C. (2007). “How natural are natural monopolies in the water supply and sewerage sector? Case studies from development and transition economics.” < http://> (Dec. 18, 2007).
9- Kolahi, R. (1992). “Estimation of the demand for water case of Shiraz 1972-1990.” M.Sc. Thesis, Shiraz University, Iran. (In Persian)
10- Rahmati, E. (2001). “An Analysis of the cost structure: The case of sarcheshme copper.” M.Sc. Thesis, Shiraz University, Iran. (In Persian)
11- Salehnia, N., Fallahi, M.A., Ansari, H., and Davari, K. (2007). “Study of municipal drinking water tariffs and its effect on water consumption pattern, case study: City of Neyshabour.” J. of Water and Wastewater, 63, 50-59. (In Persian)
12- Sabouhi, M., and Noubakhat, M. (2009). “Estimating the water demand function of Pardis city.” J. of Water and Wastewater, 70, 60-74. (In Persian)
13- Erkkila, J. (1990). “Economic information about ironmaking.” J. of Applied Economic, 27, 1335-1353.
14- MC Geehan, H. (1993). “Rialway costs and productivity growth.” J. of Transport Economics and Policy, 11, 19-35.
15- Iimi, A. (2008). “(UN) Bundling public-private partnership contract in the water sector: Competition in auctions and economics of scale in operation.” Policy Research WorkingPaper4459.< ontentServer/ WDSP/IB2008/01/02/ 000158349-0102105731/Rendered /PDF/ WPS4459 .pdf> (April. 21, 2008).
16- Tsekouras, K.D., and Zagouras, N.G. (1998). “A cost function of Greek non ferrous metal industry.” Int. J. of Production Economics, 56, 621-640.
17- Link, H. (2004). “An econometric analysis of motorway renewal costs in Germany.” J. of Transportation Research Part A, 40, 19-34.
18- Chen, C., and Tong Soo, K. (2007). “Cost structure and productivity growth of the Taiwanese international tourist hotels.” J. of Tourism Management, 28, 1400-1407.
19- Falahi, M.A., Ahmadi, V. (2006). “Measuring cost efficiency of electricity distribution companies in Khorasan province.” Iranian Economic Research, 28, 123-138
20- Bagmaz, A. (2001). “Estimation of cost function and productivity growth in the airline of Islamic Republic of Iran, (HOMA).” M.Sc. Thesis, Shiraz University, Iran. (In Persian)
21- Berndt, E.R. (1991). The practice of econometrics: classic and contemporary, 4th Ed., Addison-Wesley Pub. Co., California.
22- Al-Mutairi, N., and Burney, N.A. (2002). “Factor substitution, and economies of scale and utilisation in Kuwaitۥs Crude Oil Industry.” J. of Energy Economics, 24, 337-354.   
23- Ma, H., Oxley, L., Gibson, J., and Kim, B. (2008). “Chinaۥs energy economy: Technical change, factor demand and interfactor/interfuel substitution.” <> (June 5, 2008)
24- Van Cayseele, P., and Wuyts, C. (2007). “Cost efficiency in the European securities settelment and depository industry.” J. of Banking and Finance, 31, 3058-3079.
25- Kopsakangas-Savolainen, M., and Svento, R. (2008). “Estimation of cost-effectivness of the finnish electricity distribution utilities.” J. of Energy Economics, 30, 212-229.
26- Marzban, H., Akbarian, R., and Ghasemi, A. (2005). “An Investigation of the Iranian thermal electric power generation demand for fuels and their substitutability.” J. of Economic Research, 5(16), 51-74.