ECONOMIES OF SCALE IN HOUSEHOLD CONSUMPTION: WITH APPLICATION TO AUSTRALIA*

Abstract

This paper presents a general framework for defining the economies of scale in household consumption. It allows commodity specific economies of scale (taking into account the substitution effects). The chief contribution of the paper is to show how one can estimate economies of scale from cross section budget data without price information. The problem of identification that is inherent in these models is overcome by making use of some assumptions about the nature of goods and services employed in the estimation. The methodology developed in the paper is applied to Australian Household Expenditure Survey for 1984 to calculate item wise and overall economies of scale.