Estimating Size and Scope Economies in the Portuguese Water Sector Using the Most Appropriate Functional Form

Contrary to the usual method of most studies that apply parametric methodologies, the current study does not assume a priori a functional form to represent the cost function. Instead, a large number of functional forms are tested in order to find the most appropriate functional form for the true cost structure of utilities. The sample focuses on water utilities operating in Portugal during the period 2002–2008. The results show that there are substantial economies of output density, economies of size, and economies of scope (in the joint supply of water supply and wastewater services) and, therefore, there are huge advantages in utilities merging.