Measuring Productive Efficiency: An Application to Illinois Strip Mines

Abstract

The purpose of this paper is to apply a generalized version of the Farrell measure of technical efficiency to a sample of Illinois strip mines. We disaggregate the original Farrell measure (which was designed to measure lost output or wasted inputs due to underutilization of inputs) into three mutually exclusive and exhaustive components: (1) a measure of purely technical efficiency, (2) a measure of input congestion (overutilization of some input(s)) and (3) a measure of scale efficiency. This approach has the advantage that it provides additional information on the sources of inefficiency of production, which should be useful to managers, in general, not only in strip mining. Simple linear programming techniques are derived and used in calculating these efficiency measures for our sample. We find that Illinois strip mines are fairly efficient (relative to each other). The major source of inefficiency was due to deviations from the optimal scale of production. We also find suggestive evidence that inefficient mines tend to have relatively high stripping ratios, high labor-output ratios, single rather than multiple coal seams, and lower earth-moving capacity.