Technical Change and Scale Economies in an Engineering Production Function: The Case of Steam Electric Power

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 128.235.251.160 on Sun* This paper is taken from the author's dissertation written at University of California-Berkeley. The author would like to thank D. McFadden, A. Holtmann and an unnamed reviewer for their helpful suggestions and comments.1 This rather artificial separation of the engineering and economic aspects of production theory arises from the neoclassical assumption of a production function which is independent of factor prices. For an example of this neoclassical treatment, see Sune Carlson [3]. '35This content downloaded from 128.235.251.160 on SunAll use subject to JSTOR Terms and Conditions 136 THOMAS G. COWING involved in the production process, and may, in some cases, focus upon variables of secondary significance or else miss the importance of the fundamental physical relationships involved.The engineering or process approach to constructing production functions, as contrasted with the neoclassical approach which usually assumes some mathematical function having certain desirable properties, is to make use of the technical information on physical processes supplied by physical scientists and design engineers.2 Thus, the engineering production function is derived from the analytical laws of physics and chemistry or from experimentally determined approximations to these laws in the case of more complicated processes. This implies, of course, that the engineering production function approach will be easier to apply to those processes where the physical technology is well understood and where the process itself is relatively uncomplicated.3Several basic advantages accrue from using an engineering approach in the derivation of economic production functions. One advantage is that unlike statistical cross-section and time-series studies which are limited to the fairly narrow range of actual observations, the engineering approach incorporates the much wider range of all physically feasible input combinations. Thus, the engineering production function is not limited in its validity to the historical set of factor proportions which firms have used, and, therefore, is a much closer approximation to the idea of a long-run production function. A second advantage is a more precise description of the production process and a more explicit analysis of technical change, whereas statistical data even at a highly disaggregated level of analysis usually confound substitution effects, scale effects and technical change.The U.S. steam-electric power industry is ideally suited to an engineering process analysis for a number of reasons. Since the industry is publicly regulated, extensive data are available atboth the firm and plant levels. Furthermore, the ...

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