Flexible versus common technology to estimate economies of scale and scope in the water and sewerage industry: an application to England and Wales

The water industry presents several structures in different countries and also within countries. Hence, several studies have been conducted to evaluate the presence of economies of scope and scale in the water industry leading to inconclusive results. The lack of a common methodology has been identified as an important factor contributing to divergent conclusions. This paper evaluates, for the first time, the presence of economies of scale and scope in the water industry using a flexible technology approach integrating operational and exogenous variables of the water companies in the cost functions. The empirical application carried out for the English and Welsh water industry evidenced that the inclusion of exogenous variables accounts for significant differences in economies of scale and scope. Moreover, completely different results were obtained when the economies of scale and scope were estimated using common and flexible technology methodological approaches. The findings of this study reveal the importance of using an appropriate methodology to support policy decision-making processes to promote sustainable urban water activities.