Measuring Capacity Utilization Using A Short-Run Cost Function: An Application to Bahrain Economy

The main objective of this study is to measure and analyze one of the major components of economic performance, namely capacity utilization, in Bahrain (one of the six Gulf Cooperation Council, GCC, countries) economy over the time period 1984-1999. Exploiting recent developments in dual cost theory, a well-defined method for empirical estimation of capacity utilization was established. An empirical model, Cobb-Douglas short-run variable cost function, was employed as an application of this dual-cost estimate of capacity utilization in Bahrain economy. The findings of this study showed that the presently structured industries in the Bahrain economy, in general, have experienced capacity under-utilization. This implies that there is significant room for increasing production levels with no additional capital required. Three main considerations are given for full capacity utilization: rationalization of the existing structure of some industries and limitations of new entry; regional integration creating larger markets for existing industrial capacity; and technological adaptation that hold the efficient minimum economic scale of industries for small-market economy such as Bahrain.