Are There Economies of Scale in Highway Maintenance? What about Costs Due to Market Power?

Lawrence Southwick

Assoc. Prof. Emeritus, Department of Finance & Managerial Economics, School of Management, University at Buffalo; Formerly Councilman & Former Comptroller, Town of Amherst, NY, USA.

DOI: 10.4236/ib.2014.62010                

Abstract

The object of this paper is to determine whether there are economies or diseconomies of scale in highway maintenance and whether higher concentration levels/greater market power across the governments involved in highway maintenance results in higher or lower cost levels. The data used come from New York State municipalities. New York is divided into Towns and Cities that added together give the total land area for the State. There are also Villages that are located in one or more Towns. All of these government entities may own and manage/maintain highways. The results are that 1) there are significantly U-shaped average cost curves, but the differences in average costs between communities with lower numbers or higher numbers of lane miles than the most efficient are not very great and 2) there are both substantial and significant increases in average costs when market power is greater. Thus, making the case for mergers of communities is more difficult and such mergers would be more problematic.

Keywords

Scale Economies, Market Power, Municipal Highways

Conflicts of Interest

The authors declare no conflicts of interest.

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