Public Capital, Congestion and Private Production in Australia

This paper is an empirical investigation into the impact of public capital on the private sector’s economic activity in Australia. In particular, it is assumed that the contribution of public capital to private factor productivity is subject to congestion. New data sets of capital stocks and private output are constructed for the Australian economy. By estimating flexible functional forms of private sector production functions with congestion in public capital services, the paper shows that public capital is productive in private production but is subject to congestion. A one per cent decrease in the public capital output ratio would result in about 0.5 per cent decrease in private output. Empirical evidence also suggests that the restriction of constant returns to scale over private inputs, labour and private capital, and public inputs is valid.