The Measurement of Efficiency Relative to a Frontier Production Function

A method is presented for estimating a frontier production function allowing economies and diseconomies of scale using linear programming techniques. The general applicability of this function is illustrated by considering the neutral and nonneutral cases. Indexes of technical, price, and economic efficiency of production of observations of equal scale are introduced. Three equivalent efficiency indexes are offered which measure the efficiency of altemative scale activities. Utilization of the efficiency indexes in determining the nature of the produc-tion function, causes of observed inefficiency, and the degree and nature of technological advance are discussed. MUCR of economic analysis is concernedwith the technical and economic effi-ciency of resource transformation and allocation. Conventional measures of efficiency dealing with a single factor of production (the average productivity of labor, for example) are conceptually unsatisfying. The economic-engi-neering or cost synthesis approach applied by French, Sammet, and Bressler can be used t