September 23, 2010

Diseconomies of Scale

Yes, diseconomies of scale exist in the public sector just as they do in the private sector.

“Countries with small public sectors report significantly higher PSE [public sector efficiency] indicators than countries with medium-sized or big public sectors. All these findings suggest diminishing marginal products of higher public spending. The results that we get from the production-frontier-related FDH analysis, which uses the PSP indicators, are also in line with the aforementioned conclusions. Small governments tend to show better results. Spending in big governments could be, on average, about 35 per cent lower to attain the same public sector performance. The calculations also point out that EU 15 countries show relatively low public sector efficiency when compared with the US and also the average of the other OECD countries in the sample. EU 15 countries are using 27 per cent more public spending than the “most efficient” countries with similar PSP indicators. Spending for the average of the other OECD countries is “only” 11 percent higher than necessary.”


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