Generalised Farrell Measures of Efficiency: An Application to Milk Processing in Swedish Dairy Plants

Farrell's study of measures of efficiency are generalized to inhomogeneous production function and applied to the Swedish milk processing industry during the period 1964-1973. The purpose of efficiency estimates at the industry level is to determine the structure of the industry. Two types of efficiency measures are studied: technical and scale efficiency. A measure of technical efficiency of an entire industry is structural efficiency. A high level of structural inefficiency was found in the milk processing industry, and the trend is increasing. The distribution of the individual measures of technical efficiency and scale efficiency reveals a large variation in efficiency between units for all years. Some of these differences in efficiency can be explained by the modernity of equipment, and others can be explained by differences in management capability.