This study estimates cost inefficiency when providing basic infrastructure within a stochastic frontier analytical framework, and investigates the existence of decreasing average costs resulting from economies of scale, associated with larger population and number of dwellings per area, and economies of density, brought about by urban sprawl reductions, to calculate optimal population densities. The methodology relies on the assumption of a cost minimizing behavior on the part of public officials that is characterized by way of a flexible translog cost function. We study in depth the water sector including water supply as well as sewerage and cleansing of residual waters, and considering data at the municipality level for the Spanish region of Castilla y Leon.
The results indicate that latent scale and density economies as well as relevant inefficiency levels are present, and that they are result of a general suboptimal urban size, in terms of population densities, and the negative effects of dispersed settlement patterns.
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