TITLE:
Scale Economies: An Economic Blessing? Should We Build Still Larger Ships?
AUTHORS:
Alexandros M. Goulielmos
KEYWORDS:
Cobb-Douglas Production Function, Short and Long-Run Periods, Supplementary Analysis to Shipping Microeconomics, Evidence of Scale Economies in Shipping
JOURNAL NAME:
Modern Economy,
Vol.12 No.8,
August
31,
2021
ABSTRACT: We represented shipping production using the
Cobb-Douglas function: Q = A × Cα × Lb,
which relates: 1) Capital, Labor and Production. 2) Indicates: Embodied
technical progress; 3) the shares in production of Capital and Labor, and 4)
the Scale Economies! We consciously digressed from “constant returns to scale”,
and selected α + b > 1 for shipping industry and A = 1.07 due only to the higher speed of the vessel. We dealt also
with the Marshallian artificial distinction of the economic periods in short
and long. This we had to do it as the scale economies were related to
long run, when capital (ships) is changeable. In shipping, we have the wrong
idea that Capital and Labor quantities are fixed, and so isoquant lines are
right angles. However, we accepted this as a working assumption, and also, we
adopted complementarity between Capital and Labor. We showed also that shipping
companies can be always in the long run! Shipping microeconomics is
incomplete. The equilibrium of: 1) the vessel and 2) the shipping firm in the
short and long run is missing. We attempted to provide these, as well
industry’s equilibrium. Moreover, we showed the equilibrium… outside the
equilibrium during a shipping depression and boom, when demand is either
shorter or higher than optimal. We emphasized the technical efficiency
of the vessels at shipbuilding stage, and then we introduced the iso-cost
lines. Mathematically and diagrammatically, we identified the scale economies
in maritime industry, where seaborne trade is the King. The typical bulk
carrier from 34,000 average size in 1981 reached 81,284 dwt by 2011, judging by
ships on order (2.4 times larger)! This paper revealed, however, that the
Global financial Crisis in end-2008 curtailed scale economies! Two
numerical examples used proved scale economies in maritime industry: the cost
of building a 30,000 ship fell from $867 per dwt to $347 (for a 170,000 dwt),
and the long run average total cost fell from $191 to $74… Also, for a
75,000-dwt tanker the long run average total cost fell from $13.08 to
$6.72, for a ship 3 times larger. We found out also that ports “sabotage” scale
economies in shipping as when the size of a tanker increased by 3 times, the
port cost increased by 4 times! Our last warning was, however, that scale
economies are a good thing, but they depend on the parcel size, and the other
factors presented in the text, and in a final analysis they depend on
appropriate, each time, individual demand (per vessel)! So, we may say
to shipowners: build larger ships, if demand is there.