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5 Cost Models > Data - Pg. 141

Nerlove's Cobb­Douglas Cost Model 141 consensus is that distributed electricity is not a homogeneous good. This was discussed further in the empirical chapter (Chapter 4), but for now suffice it to say that different end users have different elasticities of demand and that some users are more costly to serve than others. NERLOVE'S COBB­DOUGLAS COST MODEL As stated previously, among the first to estimate a cost function for the electric utility industry was Marc Nerlove, who in 1963 employed a Cobb­Douglas cost function to assess returns to scale in the generation of electricity. The form of the equation he estimated is given by ln C = 0 + y lnY + 1 lnp à + 2 lnp à , 1 2 (5.1) where p i * denotes transformed input prices. [See Chapter 4, Equations (4.26)­ (4.40), for derivation.] Using 1955 data, Nerlove found that there were significant scale economies in the generation of electricity for nearly all firms in the sample. Years later, Christensen and Greene used a more flexible functional form to reestimate Nerlove's model using both 1955 and 1970 data and found that, by 1970, most of the scale economies had been exhausted. The models by Nerlove and