ALLOCATIVE EFFICIENCY OF RURAL NEVADA WATER SYSTEMS: A HEDONIC SHADOW COST FUNCTION APPROACH

The efficiency of the water utility firms in rural Nevada and their input optimization are examined in this study. The empirical methodology incorporates a hedonic specification of the nonminimum globally concave cost function in estimating the effect of the regulatory environment and the quality of water services on the optimum utilization of inputs. Allocative distortions are introduced through shadow prices and are specified as functions of regressors which make distortion factors firmand input‐specific. The results show that 76 percent of the water utilities of rural Nevada in the sample overutilize energy relative to labor. The impact of allocative distortions on each firm's cost is also computed.