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Exercise 5.1 Technical, cost and allocative efficiency in bus operations The following table gives some basic information relating to two small-scale bus operators: Company B 5 21 Number of buses: Number of employees: Average wage: Vehicle kilometres run: Bus cost per kilometre (including fuel costs): Annual number of passengers carried: Company A 3 13 19000 210000 0.36 370000 16000 300000 0.30 460000 a) Consider the following questions: 1 Which of the two companies is more technically efficient in the production of bus services (note: you will need to separately calculate labour productivity and bus productivity and compare the two figures)? Ii Which of the two companies is more cost efficient in the production of bus services? Ill Which of the two companies is more allocatively efficient? b) In your answer to part a. (1) you should have found that Company A had an advantage in both productivity ratios, hence by implication is more technically efficient. However, say this had not been the case. For example, if Company B had only 16 Staff rather than 21 then it would have a superior labour productivity but an inferior bus productivity, hence there would be no clear answer (you should check this), as that would be dependent upon the balance of the two inputs used in the production process. In other words, such evaluations need some way of combining these ratios to come up with a single answer. One fairly simply way of doing this would be to weight each productivity ratio by that factor inputs share of costs. This would be a basic form of what is known as a Tornqvist productivity ratio. You should now calculate this Index for both Company A and Company B using B's revised labour figure of 16 Staff to determine which company is more technically efficient