Estimation of the Demand Function of Water for the Industrial Sector Using Translog Cost Functions (Case Study: Zahedan City)

Rigi, S; Shahraki, J

Estimation of the Demand Function of Water for the Industrial Sector Using Translog Cost Functions (Case Study: Zahedan City)

2017

Rigi, S | Shahraki, J

The main objective of the current study was to estimate the demand function forwater in the industrial sector of Zahedan city based on the methodology of dualitypremise. To this end, the trans-log cost function which is considered as a morerobust framework for the analysis of production relationships was utilized toestimate the demand function of water in the industrial sector instead of usingconventional production methods. This is an applied survey in which the trans-logcost function and the cost share equations using Iterative Seemingly UnrelatedRegressions (ISUR) approach. After the estimation of the model, the productioninfrastructure technologies, the substitution and price elasticity were calculatedand homothetic, constant return to scale and Cob-Douglas hypotheses for theproduction function were tested using Eviews software. The data of the study referto 30 active production units located in the industrial clusters of the Zahedan cityduring the period from 2011 to 2012. Data were collected through questionnaires.The determination coefficient of the model was equal to 97 percent whichindicated the goodness of fit. On the other hand, the results of the modelestimation represented water as a non-elastic commodity because the priceelasticity calculated for water was less than 1 (-0.07). Moreover, the calculatedvalues for Allen-Uzawa and Morishima elasticities indicated a strong substitutionrelationship between water as a production input and machinery (6.69) andbuilding (1.30) inputs. On the other hand, there was a weak substitution effectbetween water and land inputs (0.65) and a complementary relationship existedbetween water and labor inputs (-0.43). However, it should be mentioned that thehomotheticity, constant returns to scale, and the Cob-Dagoulas form of the costfunction hypotheses were rejected based on the Maximum Likelihood Ratio(Wald-Statistic).

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