Estimation of the Demand Function of Water for the Industrial Sector Using Translog Cost Functions (Case Study: Zahedan City)

The main objective of the current study is to estimate the demand function for water in the industrial sector of Zahedan city based on the duality premise methodology. To this end, the trans-log cost function which is considered as a more robust framework for the analysis of production relationships is utilized to estimate the demand function instead of using conventional production methods. This is an applied survey in which the trans-log cost function and the cost share equations using Iterative Seemingly Unrelated Regressions (ISUR) approach. The study estimated the production infrastructure technologies, the substitution and price elasticity. We also tested several hypotheses such as homothetic, constant return to scale and Cob-Douglas hypotheses for the production function. The data of the study refer to 30 active production units located in the industrial clusters of the Zahedan city during the period from 2011 to 2012. Data were collected through questionnaires. The determination coefficient, R2, of the model was equal to 97 percent indicating the goodness of fit. On the other hand, the results of the model estimation represent that water is a non-elastic commodity because the value for price elasticity of demand is calculated less than 1 (-0.07). Moreover, the calculated values for Allen-Uzawa and Morishima elasticities indicated a strong substitution relationship between water as a production input and machinery (6.69) and building (1.30) inputs. On the other hand, the findings demonstrate that there is a weak substitution effect between water and land inputs (0.65) and a complementary relationship between water and labor inputs (-0.43). However, it should be mentioned that the homotheticity, constant returns to scale, and the Cob-Dagoulas form of the cost function hypotheses were rejected based on the Maximum Likelihood Ratio (Wald-Statistic).