A Note on Economies of Scale in Selected Stus

The prime objective of this paper is to empirically investigate the nature of scale economies in State Transport Undertakings (STUs) in India on the basis of a sample of medium- and large-size Indian states for which consistent data are available. To examine this issue, a translog cost function is estimated jointly with factor share equations subject to required coefficient restrictions by using the method of 'Zellner's iterative' technique. An examination of optimal size of STUs reveals that most of the STUs deviate from their efficient level of production. In general, medium and large size STUs faced diseconomies of scale, whereas small size STUs experienced economies of scale. Evidence of higher costs in a non-competitive context, together with decreasing returns to scale, shows that the division of large monopolies into smaller firms covering different market segments for which they should compete would lead to a substantial amount of cost savings