Production Economics and Efficiency: An Overview

This paper offers an overview of production economics and its usefulness in economic analysis. It presents all key arguments of production economics and efficiency under general conditions and in an integrated manner. An empirical example illustrates how the methods can be applied. The paper also investigates four somewhat unexplored topics in production economics: (1) the effects of a nonconvex technology, (2) the role of profit maximization, (3) economies of diversification, and (4) pricing efficiency and the role of nonlinear pricing. While it is well-known in economics that competitive markets support efficient allocations under a convex technology, this result does not apply under nonconvexity. In this context, we argue that restoring efficiency can require nonlinear pricing. This seems important in evaluating economies of diversification; under nonconvexity, competitive markets can lead to inefficient specialization (which may be particularly concerning applied to environmental management). Implications for management and policy are discussed.