Economies of scale in public education: An econometric analysis

This article investigates the sources of scale economies in the production of public education The relationship between the average cost of producing educational output and school characteristics including school and district size is estimated using a neoclassical cost function. The empirical analysis uses panel data from Utah school districts and estimates the function using the covariance and error component models after making necessary corrections for heteroskedasticity and autocorrelation. The uncorrected fixed effects model generates a significant negative coefficient on district size in both the cost and expenditure functions; the coefficient on number of students has the hypothesized sign brit is not significant iii either equation. After making various corrections for autocorrelation and heteroskedasticity the coefficients have the correct signs and are significant in all equations. Thus, it is concluded that scale economies arise front both sources but that the evidence is stronger for district size.