DISTINGUISHING EXTERNAL FROM INTERNAL SCALE EFFECTS - THE CASE OF PUBLIC INFRASTRUCTURE

The recent applied production theory literature focusing on the econom ic performance of firms has increasingly recognized the importance of scale effects on costs and therefore efficiency. These scale effects m ay include short run returns due to fixity of privately demanded input s (i.e., capital, long run internal returns to scale, and external fac tors affecting costs. Since these different types of scale effects can be thought of as shifts in and movements along cost curves, the diffe rent cost effects of such factors can be identified in a framework whi ch explicitly takes them into account in the definition of scale. In t his article we formalize such a framework, and then use it to measure short run, long run (internal) and external scale effects from fixity of private capital, nonconstant returns to scale and public infrastruc ture. We then use these measures to identify the impacts of these diff erent scale factors on productivity growth. The focus on public infras tructure as an important ''external'' scale factor is motivated by the current theoretical and policy interest in this issue; we show how a structural production theory model provides a rich basis for the analy sis of the cost effects of infrastructure investment.