The Objectives of this Study

We have four goals we wish to accomplish in this study. The first two are interlinked, and involve the development of a model of efficient producer behavior, and the simultaneous development of a taxonomy of possible types of departure from efficiency, in a variety of environments. These two goals are accomplished by constructing a variety of production frontiers, and measuring distance to the frontiers. The third goal is the development of an analytical and computational technique for examining the first two. The technique we use, linear programming, is one of several available techniques, but is the one we prefer. The fourth goal is a demonstration of the wide applicability of the approach we take to modeling producer behavior. We meet this fourth goal in a number of ways, but primarily by adopting an attitude throughout the study that this is a study in applied production analysis. We focus on the empirical relevance of producer frontiers and distance tothem. We apply the linear programming techniques to artificial data to illustrate the type of information they can generate. And we frequently suggest problems to which these ideas can be applied.

Conventional microeconomic theory is based on the assumption of optimizing behavior. Thus it is assumed that producers optimize from a technical or engineering perspective by not wasting resources. Loosely speaking, this means that producers operate somewhere on the boundary, rather than on the interior, of their production possibility sets. Producers are also assumed to optimize from an economic perspective by solving some allocation problem that involves prices.