Ceris-CNR, W.P. N° 14/1997
Paper presented at the 24th Annual Conference of the European Association
for Research in Industrial Economics, August 31-September 3, 1997, Leuven,
Belgium

1.

Introduction
The Italian Water Industry is greatly fragmented: there are more than 6,000

companies with an average of 9,000 inhabitants served. Furthermore, if we consider
that the 200 largest firms provide more than half of the total volume supplied, the
undersizing of the other operators seems extremely serious. This situation
generates inefficiencies that, especially in the South, hinders the matching of the
demand and determines low levels of investments. The latter are fundamental to the
renovation and enlargement of the existing facilities, to the improving of quality
and productivity.
The reorganisation of the sector, based on the “Galli Act” (1994), aims at
grouping small firms in order to reach the “optimal size” which should bring firms
to enter the financial market and to increase productivity and profitability. The new
law states also a tariff regulation that should lead to the improvement of the quality
and the efficiency of the service. It is obvious that the study of the underlying
technology is very important because it allows to evaluate the characteristics of the
service and the existence of economies of scale.
The purpose of this paper is to analyse the technology of the water industry.
The first aspect to be tested is whether and how environmental and qualitative
characteristics affect the production process and the associated costs. The second
is the identification of the functional form which is the most suitable to represent
the underlying technology. The analysis is structured as follows. Section 2
describes the nature of water service. Section 3 justifies the study of the
technology by means of a cost function. Section 4 presents the model and the data
base. The traditional approach and the hedonic one are then compared (Section 5)
and the functional form which best fits the technology of water industry is
evaluated (Section 6). The economies of scale are analysed in Section 7.

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