The Nature of Returns to Scale in Aggregate Production with Public Intermediate Goods

This paper examines returns to scale in aggregate production when public inputs are used in the production process of firms. The conditions for productive efficiency are derived for commonly used public input specifications, where a rise in the number of firms or in the employment of private factors causes congestion. The analysis shows how the returns to scale varies with the congestion technology, the degree of congestion, and the returns to scale in public input production. While the conditions for productive efficiency differ for two commonly used public input specifications, aggregate production may exhibit increasing returns even for fully congestible public inputs in both cases.