Analysis of the Allocative Efficiency in Public Firms: the Case of Railway

This paper discusses whether a public firm such as RENFE satisfies the cost minimization condition. Through the estimation of the shadow prices of the production inputs we obtain the grade of the firm’s allocative inefficiency and its origin. The methodology used is based on the estimation of a Shephard distance function for the input, the dual of the cost function, which fully represents the technology and is valid for multiproduct and multifactor firms, with which the shadow prices of the inputs may be obtained making unnecessary the use of their market prices. From the results obtained in this paper, it may be verified that shadow prices are different to market prices and, therefore, the public firm RENFE does not use the productive inputs in the optimal proportion, that is, it does not minimize costs in relation to the market prices. It may be observed that the capital input is being over-utilized in relation to energy, whereas labour is being over-utilized in relation to the rest of the inputs.