Miller, Stephen E.

English

Research Papers in Economics

SOUTHERN  JOURNAL  OF AGRICULTURAL  ECONOMICS  JULY,  1984
DISCUSSION:  METHODS  FOR  EVALUATING  ECONOMIC
EFFICIENCY  IN  AGRICULTURAL  MARKETING
Stephen  E.  Miller
The paper by Kilmer and Armbruster provides  the  forms of efficiency listed above, and  adding
an  overview  of available  models  and methods  O-efficiency  and X-efficiency,  I have a good start
for  measuring  efficiency.  The  authors  discuss  on  a  comparable  collection  of efficiency  defi-
the  circumstances  in which  these  models  and  nitions.  My point  is that the  term  "efficiency"
methods  may  be  appropriately  applied,  some  conjures  up  many  diverse  images.  Thus,  econ-
of  their  limitations,  and  some  areas  in which  omists  should be very specific  in references  to
further research  is  needed.  As  such,  the  paper  "efficiency"  and the particular  definitions  that
may be  considered  a partial  update  of the  om-  are used.  One  of the problems  I  have with  the
nibus  reviews  of  efficiency  research  by Helm-  paper  by Kilmer  and  Armbruster  is  that  I  am
berger et al.,  and French.  Given the constraints  not  always  sure  of their  definitions.
on the length  of their paper,  the authors could
obviously  present  only  selected  topics  from  MEASURING  PRODUCTIVE  EFFICIENCY
among the many covered  by the broad umbrella
of  efficiency  research.  I  have  few  arguments  I suppose  that most would  agree that among
with  what  the  authors  have  said.  As  a  conse-  efficiency,  economists  a the various forms of efficiency,  economists  are quence,  I will focus my remarks  on some topics  best able to measure productive  efficiency;  i.e.,
which Kilmer and Armbruster  have not covered  the pvate,  pecuniary unit  cost of production
to  the  extent  to  which  I  think  they  deserve  (Lang).  But,  even  here,  there  are  problems.
attention. ~~~~~~attention.  ~Pasour  and Bullock  have  pointed  out that effi-
ciency  norms  should  take  account  of the  en-
DEFINITIONS  vironment  in  which  real-world  decisions  are
made. They cite uncertainty, costly information,
First,  I  have  a  few  comments  regarding  def-  and  the  interdependence  of  time  periods  as
initions.  In  the  paper,  the  following  forms  of  salient features  of the real-world  which are too
efficiency  are  mentioned:  technical  efficiency,  frequently  ignored  in  attempts  to  measure  ef-
redistribution  efficiency,  price  efficiency,  allo-  ficiency.  That  is,  ex post analyses  of efficiency
cative  efficiency,  production efficiency,  cost  ef-  ignore  the problems  faced  by economic  actors
ficiency, and economic efficiency. Unfortunately,  ex  ante.
not all authors  agree on the  definitions  of thesent  have  models  and  methods
terms. For example, Kilmer and Armbruster along  been developed and applied which take account
with Bressler and King (p. 404) call the product  complicationConsider  models which
of  ic  efficiencyas  attempt  to  evaluate  the  optimal  and pricing  efficiency  as  used  bration
Farrell)  economic  efficiency,  whereas,  Farrell  of plant numbers  sizes  and  locations.  Kilmer
identified  this product as overall  or productive  and  mbruster  report  progress  in  the  devel- and  Armbruster  report  progress  in  the  devel- efficiency.  Lang has pointed out that productive  opment  and  application  of  dynamic  plant  lo-
efficiency  (as used by Farrell and thus economic  cation  models.  But  what  of  the  effects  of
efficiency  as used in places by Kilmer  and Arm-  uncertaint? An assumtion of the  lant location uncertainty? An assumption of the plant location bruster)  is  not synonymous  with  economic  ef-  modeling  process  is  that  commodity  (input) modeling  process  is  that  commodity  (input)
ficiency  as used  by Henderson  and Quandt  (p.  supplies  are fixed  at each  origin.  In empirical
255),  who  identify  economic  efficiency  as  applications,  the fixed  supplies  are usually  es-
Pareto-optimality;  i.e., Pareto-efficiency.  To fur-  timated as either the average production  of the
ther add  to  the  confusion,  Kopp  calls pricing  commodity  at  each  of  the  origins  over  some
efficiency  (as  used  by  Farrell)  economic  effi-  historic  period  or  as  projected  production  of
ciency.  the  commodity at  each  of the  origins  at some
I recall  a story,  perhaps apocryphal,  that Pro-  future date.  However,  both of these approaches
fessor  I. J.  Good  has collected  more  than  100  ignore  the  considerable  yield  variability  char-
alternative  definitions  of probability.  Counting  acteristic of many agricultural commodities.  For
Stephen E.  Miller is an Associate  Professor,  Department of Agricultural  Economics and Rural  Sociology, Clemson University.
Invited discussion presented at the annual meeting of the Southern Agricultural  Economics Association, Nashville,  Tennessee,
February 5-8,  1984. Invited papers  are routinely published  in the July SJAE without editorial council review but with review
of  the copy  editor  (as per  Executive  Committee  action June  25,  1982).
111a particular  origin, supplies would be expected  put  level  as  compared  to  not producing  it  at
to  be  above-average  one-half the  time,  and  be-  all  and  the  output  of  that  product,  and  the
low  average  during  the other.  marginal  cost of that  product)  and  economies
How do decisionmakers  cope with  uncertain  of  scope  (the  relationship  between  costs  of
supplies?  One  means  of  coping  would  be  to  producing  multiple  outputs jointly versus  sep-
diversify  sources  of supply,  say by contracting  arate production).  These  concepts can be com-
for supplies  from several  origins.  Thus,  while  bined  to  obtain  a  measure  of  multiproduct
plant location  models which ignore supply un-  economies  of scale.  Empirical  studies based on
certainty  may  indicate  an  "efficient"  solution  these  concepts  are  only beginning  to  become
in  which  a  particular  plant  receives  supplies  available.  To  my  knowledge,  no  such  studies
from  only  a  limited  number  of origins,  actual  have been made in the area of agricultural  mar-
shipment patterns  in which plants receive  sup-  keting.  Development and application of empir-
plies  from numerous  origins  may be  observed.  ical  methods  for  purposes  of  testing  the
That  is,  plants  have  a  "portfolio"  of  supply  hypothesis-rich  work  of  Baumol  et al. would
sources.  Higher  transportation  costs  are  in-  seem  to  be  a fruitful  area for further  research.
curred,  but  risks  are  simultaneously  reduced.
Another  means  of  coping  would  be  in  plant
design.  While  economic  engineering  studies
might indicate  that a  given plant design  would
yield  lowest  processing  costs  assuming  fixed  My  reactions  to  the  discussion  of allocative
supplies,  decisionmakers may well opt for plants  efficiency by Kilmer and Armbruster are mixed.
which are  more  flexible  in terms  of the  quan-  First, the number and diversity of topics lumped
tities  that can  be  processed.  That  is,  the plant  together  in  this  section  leaves  me  wondering
designs  selected  may  have  higher,  but  flatter,  what the authors  mean  by use  of the term  "al-
average  cost curves than the plants with lowest  locative efficiency."  At the outset of this section,
costs  for the  given processing  levels  indicated  the authors  state that they are  interested in the
by plant location studies (Pasour and Bullock).  extent to which exchange mechanisms generate
Solutions  to  plant  location  models  and  ob-  competitive  prices.  But,  under this  heading,  a
served  plant  numbers,  sizes,  and  locations  do  review  of  some  recent  work  in  the  area  of
not  conform.  It  may  be  that  our  models  are  welfare  economics  that,  following  the  termi-
correct  and the world  is wrong,  but I  suspect  nology  of  Henderson  and  Quandt,  might  be
that  incorporation  of  risk  considerations  into  better  termed  analyses  of  Pareto-efficiency  is
the  modeling  process  might  well  reduce  the  offered.  No  indication  of  how  these  develop-
disparity  between  model  outcomes  and  ob-  ments have  been,  or should be,  applied  in  de-
served  configurations.  termining  the  extent  to  which  exchange
Kilmer  and  Armbruster  point -out  that  our  mechanisms  generate  competitive  prices  is
attempts  to measure  productive  efficiency  gen-  given.
erally have  ignored the problem  of multiprod-  The  work  by  Carl,  Kilmer,  and  Kenny;  and
uct  relationships.  Given  the  trend  toward  Kilmer  and  Ward  concerning  the  pricing  of
product  diversification  by agricultural  market-  heterogeneous  products  would  appear  to  be
ing firms  (Conner),  this  would appear to be  a  promising first steps toward a better understand-
serious  shortcoming  of our methods  for  meas-  ing  of price  determination  in  other  than  tra-
uring productive  efficiency.  An explanation  for  ditional spot markets.  However,  I  fear the  data
the lack  of empirical  research  in  this area  has  availability problems  cited by Kilmer and Arm-
been  our lack  of theoretical  cost concepts  for  bruster preclude widespread application of these
multiproduct firms.  However, Baumol  et al.  have  models.
made  recent  advances  in  this  regard  by intro-  Kilmer and Armbruster  conclude their paper
ducing  the  concepts  of product-specific  econ-  by noting that although progress has been made
omies  of  scale  (the  relationship  between  the  in  developing  methods  and  models  for  evalu-
ratio  of  the  addition  to  total  costs  associated  ating efficiency, much work remains to be done.
with  producing  a given product at a given out-  I  concur.
REFERENCES
Baumol,  W.  J.,  J.  C.  Panzar,  and  R.  D.  Willig.  Contestable Markets and the  Theory of Industry
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Bressler,  R.  G.,  and  R.  A.  King. Markets,  Prices, and Interregional  Trade. New York: John Wiley
& Sons,  Inc.,  1970.
Carl,  E.,  R.  L. Kilmer,  and  L. W.  Kenny.  "Evaluating  Implicit  Prices  of  Intermediate  Products."
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Farrell,  M.  J.  "The  Measurement  of Productive  Efficiency."  J. Royal Stat.  Soc.  120,  part  3,  ser. A
(1957):253-281.
French,  B.  C.  "The Analysis  of Productive  Efficiency  in Agricultural  Marketing:  Models,  Methods,
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York:  McGraw-Hill  Book Co.,  1971.
Kilmer,  R.  L.,  and  R.  W.  Ward.  "Simulating  the  Performance  of  a  Multiple  Exchange  Mechanism
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Kopp,  R.  J.  "The  Measurement  of  Productice  Efficiency:  A  Reconsideration."  Quar. J.  of Econ.
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Pasour,  E.  C.,  and J.  B. Bullock.  "Implications  of Uncertainty  for the Measurement  of Efficiency."
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113114

Contestable Markets and the Theory of Industry Structure.

Economic Efficiency and Policy Comparisons.&quot;

Evaluating Implicit Prices of Intermediate Products.&quot;

Implications of Uncertainty for the Measurement of Efficiency.&quot;

Markets, Prices, and Interregional Trade.

Micro-economic Theory: A Mathematical Approach.

Organization and Performance of Agricultural Markets.&quot;

Simulating the Performance of a Multiple Exchange Mechanism Market.&quot;

The Analysis of Productive Efficiency in Agricultural Marketing: Models, Methods, and Progress.&quot;

The Measurement of Productice Efficiency: A Reconsideration.&quot;

The Measurement of Productive Efficiency.&quot;

The U.S. Food and Tobacco Manufacturing Industries: Market Structure, Structural Change, and Economic Performance. Agricultural Economic

DISCUSSION: METHODS FOR EVALUATING ECONOMIC EFFICIENCY IN AGRICULTURAL MARKETING

DISCUSSION: METHODS FOR EVALUATING ECONOMIC EFFICIENCY IN AGRICULTURAL MARKETING

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