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The gains and structural effects of exploiting scale-economies in Norwegian grain production

 

In this paper we present calculations  of the economic gains in terms of reduced costs by exploiting scale-economies in specialized grain production in Norway, and the effect this will have on the number and average size of the farms. We also explore whether or not optimal scale and unexploited scale-economies change over time due to scale-augmenting technical change.  The analysis is based on homothetic cost functions estimated by means of data for individual farms for the period 1972-1996. The estimated average cost function looks like an asymmetric U, with a rather flat right part. Cost-optimal scale increases  substantially over time, and is almost three times larger  in 1996 than in 1972.  By exploiting the  scale-economies, we find that the costs could have been reduced by about 35-40%, while the number of farms would have been reduced by about 85-90%. Even if average farm size has increased in the period analysed, unexploited  scale-economies increase slightly over time as well, due to  strong scale-augmenting technical change.