Econometrica: Oct 1961, Volume 29, Issue 4

Capacity Expansion and Probabilistic Growth

https://doi.org/0012-9682(196110)29:4<632:CEAPG>2.0.CO;2-K
p. 632-649

Alan S. Manne

This paper is concerned with the optimal degree of excess capacity to be built into a new facility such as a pipeline, a steel plant, or a superhighway. The problem is complicated by: (1) the presence of substantial economies of scale in plant construction; (2) the penalties involved in accumulating backlogs of unsatisfied demand; and (3) the use of a random-walk pattern rather than a deterministic upward trend in demand.

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