National Tax Association

AN EMPIRICAL COMPARISON OF GOVERNMENT AND PRIVATE PRODUCTION EFFICIENCY

Author(s): WILLIAM J. PIER, ROBERT B. VERNON and JOHN H. WICKS
Source: National Tax Journal, Vol. 27, No. 4 (December, 1974), pp. 653-656
Published by: National Tax Association
Stable URL: http://www.jstor.org/stable/41861996
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 AN EMPIRICAL COMPARISON OF GOVERNMENT AND
PRIVATE PRODUCTION EFFICIENCY
WILLIAMJ. PIER,ROBERTB. VERNON,AND JOHNH. WICKS*

ABSTRACT governmental productivity and cost func-

To comparegovernmental versusprivate tionsattempted has dealt with education.
productionefficiency, this paper estimates Outputhas typically beenmeasured as indi-
production functions forpublic and private vidual student performance on standardized
collectionof garbagein variousMontana cognitiveskillsexaminations or changein
municipalities on the basis of data obtained individual student performance. Inputsor
from27 collectors. Functions oftheLeontief costshave oftenbeen statedas somecom-
formprovidedthebestfits.Withrespectto bination ofcostperpupil,serviceconditions
labor,publiccollection was moreefficient at reflecting requirements forinputs,and the
all outputlevels. With respectto capital, technologyand qualityof inputsused.3
the publicsectorwas less efficient at low However,publishedstudieshave focused
outputscalesand moreefficient at higher on theabsoluteeffectiveness of publicedu-
scales of output.Derivingcost functions cationratherthan comparingpublicwith
from the productionfunctionsindicated privateproduction.
publiccollectionto be moreefficient than
privatecollection in communities withpop-
Scope of theStudy
ulationexceedingapproximately 1,750.
Thisstudyestimates empirically andcom-
of governmentalparesproduction functions for governmental
•y he relativeefficiency of a service,
and privateconductof production has and privateproduction garbage
been a for collection.Garbage collection was chosenas
long subject speculative disagree- becauseof its
ment.Whilea popularpublicviewhasbeen theserviceforconsideration
that government is inherently inefficientsimilarnatureamongvariouslocalities, the
fromthe lack of a profitmotive,others abilityto estimate the quantity of service
the existenceof manyseparate
have furnished plausiblerationalefor the provided,
localitieswhere theserviceis provided, and
comparative efficiencyof government.1
Since comparative and ineffi- alternative provision of the service govern-
efficiency andprivately. Thegeographic
ciencyof government production are both mentally scope
of of thestudy was the stateof Montana. This
conceivablehypotheses, determination
relativeefficiency becomes an empirical area was of large enough size to provide
the question is one of sufficient observations yet be reasonably
question. Specifically,
estimating comparative production or cost homogeneousin the relativeportionsof
forpublicandprivateproduction. commercial and residential land use in the
functions
of data various communities.
Because of problems availability,
stemmingin part fromthe difficulty of Frominformation providedbytheMon-
a unitof service, there has been tana Railroad and Public ServiceCommis-
defining
littlesuch estimation. Serviceoutputpos- sion and clerksof variousmunicipalities,
sessesbothquantitative and qualitativedi- therewere34 publicand 29 privatecollec-
mensions.2 Mostof theworkin estimating torsin thestate.Mailedquestionnaires were
used to gatherdata fromthesecollectors.
♦Graduate Student,Assistant Professor, and Twentyof the formerand twelveof the
Professorof Economics respectively,University
of Montana. 3Herbert a LocalGov-
J.Kiesling, "Measuring
*Forexample, see JohnE. Fisher, "Efficiency ernment Service: A Study ofSchoolDistricts in
in BusinessandGovernment," Quarterly Review New YorkState,"Reviewof Economics and
of Economics and Business,August 1962, 2, pp. Statistics,49 (August1967), pp. 356-367;
35-47. ChristopherJencks etal.,Inequality: A Reassess-
2Werner Z. Hirsch, The Economics of State mentof theEffect of Family andSchooling in
and LocalGovernment (New York:McGraw- America (New York:BasicBooks,1972),pp.
Hill,1970),pp. 147-155. 52-130.
653

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654 NATIONAL TAX JOURNAL [Vol. XXVII

latterreturned questionnaires.4 Five of the age collectionfrequency and hencein the

returned questionnaires could not be used publicsample.Withrespectto labor,there
becauseof incomplete dataor atypical oper- was a statistically significant difference in
ations,e.g., collectionin ruralareas.The the productionfunctions for once-a-week
questionnaires askedthenumber of pick-up and twice-a-week collectors. The latterwere
points,frequency and conditions of collec- less efficient.Withrespectto capital,there
tion, numberand compensation rate of was insignificant difference in thetwopro-
employees, and amounts, types,age andcost ductionfunctions, althoughthatdifference
of capitalequipment. again suggestedless efficiency fortwice-a-
A unitof outputwas defined as a pick-up weekcollectors.7 Sinceall twice-weekly col-
pointforgarbage.Sinceall of thegarbage lectorswere public, inclusionof these
collectorsin the samplewere communitycollectors in thesubsequent analysistended
wide in theircoverage,it was assumedthat to understate theefficiency of garbagepick-
theratioof commercial to residentialpoints up bygovernment.
was similarforall collectors. Two typesof For simplicity, all laborused bya given
nonuniformity in collectionpracticeraised collection was
agency assumedto be homo-
potentialproblemsconcerning the use of Given the uncomplicated nature
geneous.
pick-uppointsas theoutputmeasure. These of thetasks
involved, thisassumption seems
nonuniformities existedin thelocationand reasonable. A unitof laborwas definedas
frequency of collection.Three publicand
40 personhoursperweek.The capitalem-
threeprivatecollectors specified no particu-
lar locationof cansas a conditionforresi- ployedin thepick-upof garbageis likewise
homogeneous in character. Usually,
dentialcollection.The remainder required quite
the consists of a compactor
cansto be placedat thecurbor alley.While equipment
failureto specify canplacement wouldnor- mountedon a truck.The compactor com-
be to increase presses thegarbageto aboutone-fourth its
mally expected inputrequire- it until
volume and holds
ments,therewas no statistically significantoriginal truckswithout dumped.
are
difference in the productionfunctions for Occasionally compactors
collectors whichdid anddid notspecify col- used for small operations or on a stand-by
lectionpointsin eithertheprivateor public basis.A unitof capitalwas definedas the
sample.5All of thefirms in theprivatesam- abilityto carrysixteencubicyardsof un-
ple collected from residences onceperweek, compactedgarbage.8Otherinputssuchas
butfiveoftheeighteen collectorsinthepub- fuelwerefoundto be minorin magnitude
lic samplemadetworesidential and roughlyproportionate in use to the
pick-ups per
week.6Collectionfrequency at businesses- above measuredinputs,so were ignored.
tablishments was similarforthe two sam- Often,garbagecollectors alsooperatedumps.
and costs Inputs used in dump operationsor other
ples. Higherinputrequirements havebeeneliminated from
wouldbe hypothesized withincreased aver- relatedactivities
thestudy.
4Thenonrespondents weredivided among large
andsmallcommunities in theapproximate pro- 7As discussed functions
portion of all collectors. below,theproduction
indicatedbythedatawereoftheLeontief form.
5Asdiscussed below,theproduction functionsForoutput regressed onlaborinput, thevalueof
indicated bythedatawereoftheLeontief form. theinput-output coefficient was 189.6forthe
Chowtests(Gregory C. Chow, "TestsofEquality once-weekly collectors and 97.6 forthetwice-
Between SetsofCoefficients inTwoLinear Equa- weekly collectors.
A Chowtestindicated signifi-
tions,"Econometrica, July I960,28,pp.591-605) cantdifference between thecoefficientsat the99
yielded insignificantdifferencesbetween collectorspercentconfidence level.Foroutput regressed
whichdesignated collectionpointsand those on capitalinput, therespective input-output co-
which didnotforregressions ofoutput onlabor efficientswere448.7and439.2. The Chowtest
andoutputon capitalin either theprivate or did notindicate a significant difference in the
publicsample. at the95 percentconfidence
coefficients level.
6Thispractice suggestsnumber ofpick-ups per 8Different quantities ofcapitalthuscouldre-
weekas themeasure of output.Footnote 13 re- sultfromdifferent trucksizesas well as the
portstheresults of estimating theproductionnumber oftrucks. If laborweretobe substituted
functions withoutputmeasured approximately forcapital,thena giventruckcouldbe filled
thisway. morerapidly andmakemoretripsperday.

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No. 4] EMPIRICAL COMPARISON 655

Analysisand Conclusions PrivateSector:

An attemptwas firstmade to estimate Y -258.2 -f 370.0L; r2= .870
homothetic production functions forgarbage (0.54) (6.85)
collectionin thetwo sectorswiththe pro-
cedurederivedby Wolkowitz.9As a first Y = -474.1 + 266.4K; r2= .932
stepin thisprocedure, it was necessary to (1.35) (9.83)
testfor the best relationship betweenthe All coefficientswere signifi-
ratioof thewagerateto rentalrateand the input-output
cantly different fromzeroat the99 percent
ratioof thequantities of capitaland labor level.At the 95
per centconfidence level,
used.The weighted averagewage ratepaid theonlysignificant interceptvalue was for
by each collectorwas calculateddirectly outputregressedon capitalin the public
fromwageandemployment informationob- a fixedcapitalrequirement
tainedfromhim.Dividingthecostof each sector, indicating
in thissector.
garbagetruck,adjustedupwardfor price Fortherespective regressionsofoutputon
levelchangesinceitspurchase, bytheprod- labor,a Chowtestindicated theslope (i.e.,
uctof theunitsof capitalit constituted and variableunitof labor) to be
its estimatedlife yieldedestimatedyearly pick-upsper
significantly greaterin thepublicthanthe
depreciation.This calculation assumed privatesectorat the95 percentconfidence
straight linedepreciation whichwas consis- level.Sincethe valueswereinsig-
intercept
tentwith the fact thatoperativegarbage nificant in thetwosectors, theresultsindi-
trucksare about equallyusefulregardless cate efficiency at all outputlevels
greater
of age. The abovefigure multiplied byhalf withrespectto laborin the publicsector.
of thelifeexpectancy of thegarbagetruck A Chow testalso indicatedthe slope for
yieldedtheaverageinvestment in thetruck
overitslife.This figurein turnmultiplied output
with respectto capitalto be greater
in thepublicsectorat the99 per centcon-
by theapproximate costof borrowing, ten fidence level.However,thesignificant level
per cent, gave the estimated opportunityof thenegative in thepublicsector
coston investment in capital.The sumof means intercept
costfigures greaterprivateefficiency up to some
thedepreciation andopportunity level, and at
efficiency
was thepriceof capitalused.However,no outputlevels. greater public
greater Using the regressionsstated
significant could be foundbe- above
relationship
tweenthewage-rental ratioand thecapital- yields266 collectionpointsas the
labor ratio, ruling out estimationof a tal. equal efficiency outputwithrespectto capi-
Suppressing theinsignificant interceptin
production function ofthehomothetic form. the sector indicates1,143
private regression
Attemptswere then made to estimate collection pointsas theequal efficiency out-
otherproduction function formsfromthe putwithrespect to capital.
data. It was the Leontief,fixedinputpro- The above resultsshow greateroverall
portionsformwhichproducedhighlysig- efficiency withrespectto laborand capital
nificant results.The appropriate regression combinedin thepublicsectorbeyondsome
equationswereas follows,whereY is out- level of outputbut are indeterminate con-
put, L labor input,and K capitalinput; cerning thatoutputlevel.Derivation of cost
thet-statistics are shownin parentheses. functions fromtheproduction functions can
yield thisoutput.Tne averageof theweekly
PublicSector :
wageratesperunitof labor reported bythe
Y - -945.2 -f 646.4 L; r2= .898 collectorswas $129.60.10 Data gathered
(1.65) (11.88) fromthecollectors as describedpreviously
indicateda weeklypriceperunitof capital
Y z= -978.6 -f 447.6 K; r2= .986 of $10.38. Usingthesefigures in theabove
(4.75) (34.35) statedregression equationsyieldstheoutput
whereprivateand publicaveragecostswere
9Benjamin Walkowitz, "A Set of Explicit
Homothetic Production Functions," American 10Thedifference in meanwageratespaidby
EconomicReview,December1971, 61, pp. publicandprivate collectorswas notsignificant
980-983. atthe95 percentlevel.

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656 NATIONAL TAX JOURNAL [Vol. XXVII

equal to be 624 collectionpoints,a figure The aboveresults indicate greater govern-

typicalfora Montanatownwithabout1,750 mentalthanprivateefficiency for garbage
population.The cost functions wereC collection in Montanaforall butverysmall
$212.20 -f .2237Y for the public sector communities. In fact,theytendtounderstate
and C = $108.91 + .3893Y forthepri- the relativeefficiency of publiccollection,
vate sector,whereC is totalcostand Y is sinceonlyin thepublicsamplewerethere
output.11 instances of twice-a-week residential collec-
Suppressing thethreeinsignificant inter- tionwhichsignificantly lowersproductivity.
ceptsand repeating the calculation yielded These resultsare counterto the popular
an equal averagecostoutputof 132 collec- imageof inherent governmental inefficiency.
tion points.12The productionand cost Evidencedoesnotappearto be present that
functions withinsignificant intercepts sup- these results are biased as they apply to
pressedwereas follows;thet-statistics are Montanagarbagecollection.The rangeof
in parentheses.13 the scalesof operationsis aboutthe same
forprivateas forpubliccollectors. The only
PublicSector: city in either where there is com-
sample
Y = 594.5L; r2= .881 petitionamongcollectorshas two private
collectors. However,thesetwocollectors are
(12.8) moreefficient withrespect tobothlaborand
Y = -978.6 -f 447.6K; r2= .986 capitalthantheaggregate of theremaining
(4.75) (34.4) privatecollectors so thiscompetition is not
the source of private sector inefficiency. It
C = $22.69 + .2412Y
mustbe notedthata Montanasampleex-
PrivateSector: cludeslarge,urbanareas.Generalization of
theresultsto suchareasor to otherservices
Y = 350.3L; r2= .864 would requireadditionalstudies,withthe
(9.14) usual data availabilityproblemsof such
Y = 241.1K; r2= .915 studies.
(11.8) was a constant.) The resulting publicsector
C= .4131Y production functions wereY = -892.9 +
760.4L andY = -559.8 + 484.8K. Both
intercepts and input-output coefficientswere
11Fiveof thepublicandthree of theprivate significant at the99 percentlevel.Sincetwice-
collectors had less than624 collection points. weeklycollections occurred onlyin thepublic
Thus,27.8percentofthepublicandtwo-thirds sector, theprivate sector functions remained as
of the privatecollectors were operating on before. Chowtestsindicated theslopesforout-
"inefficient"costfunctions. putwithrespect tobothlaborandcapitalto be
12No collectors in either the or significantlygreater in thepublicthanin the
public private private sector.With respcctto labor,theoutput
sector had as few as 132 collection
points. of equalefficiency forthetwosectors was343;
13It was hypothesized thatthe significant withrespect tocapitalitwas-370. Suppressing
negative intercept in thepublicsector equation theinsignificant interceptsin theprivate sector
ofoutput withrespect to capitalmight havere- yielded respectiveequalefficiency figuresof 763
sultedfromdefining outputas pick-up points and 554. The publicsectorcostfunction was
rather thannumber of pick-ups. To testthe C = $164.13+ .1918Y.Theequalcostoutput
hypothesis, theabovecalculations wererepeatedforthesectors was 280; withtheinsignificant
withoutput measured as number of residentialprivate sectorinterceptssuppressed it was 742.
pick-ups. (As before, it was assumed thatthe Thusredefining themeasure of output did not
proportion ofcommercial to residential
pick-upssupport thehypothesis orgreatly altertheresults.

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