Effects of allocative inefficiency on resource allocation and energy substitution in Pakistan's manufacturing

• Published in: Energy economics Vol. 26; no. 3; pp. 371 - 388
• Main Authors: BURKI, Abid A, KHAN, Mahmood-Ul-Hasan
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier Science 01.05.2004; Elsevier; Elsevier Science Ltd
• Series: Energy Economics
• Subjects: Allocative efficiency; Applied sciences; Economic data; Economic models; Economic theory; Economics; Efficiency; Energy; Energy economics; Energy industry; Energy policy; Exact sciences and technology; Factor substitution; General aspects; General, economic and professional studies; Manufacturing; Pakistan; Resource allocation; Studies; Asia; Pakistan; Cost minimization; Substitution elasticity; Energy; Resource allocation; Work; Production cost; Cost function; Inefficiency; Raw materials; Capital; Manufacturing; Secondary sector
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/S0140-9883(04)00022-2

Empirical economists often ignore that firms may not minimise costs in the presence of allocative inefficiency. Assuming strict cost minimisation when actually cost is not minimum may produce biased parameter estimates and elasticities. We consider a method for estimating effects of allocative inefficiency on resource allocation and factor substitution and apply it to data from Pakistan's manufacturing. Results show strong evidence of allocative inefficiency leading to over-utilization of raw material and capital viz-a-viz energy and labour, and increasing cost of production of firms by 1% per annum. Computed elasticities diverge from their true values in the presence of allocative inefficiency. [PUBLICATION ABSTRACT]