Minimum Efficient Scale (MES)

Minimum Efficient Scale and Long-Run Average Costs in Container Terminals

Source: Adapted from Kaselimi, E.N., Notteboom, T.E., Pallis, A.A. and Farrell, S., (2011). Minimum Efficient Scale (MES) and preferred scale of container terminals. Research in Transportation Economics, 32(1), 71-80.

In economic theory, the Minimum Efficient Scale (MES) is a particularly difficult notion to define. One possible way of defining MES in a port context is by linking terminal scale to operational efficiency as reflected by the average cost function.

The Minimum Efficient Scale (MES) is the smallest terminal provider scale at which output can be produced at a minimum average long-run cost under the assumption that the terminal is operating with a given technology.

The LRAC cost curve defines all the possible options and represents the expected distribution of average costs. The LRAC curve will normally have an L-shape or a stretched U-shape. The L-shape assumes that economies of scale will gradually diminish and eventually disappear, while the U-shape requires the appearance of diseconomies of scale after the Maximal Efficiency Scale (MaxES). Since each terminal has different configurations and equipment, there is a range of terminal-specific MES (Terminal 1, 2, and 3). For instance, Terminal 1 is likely to be a small facility with limited equipment, while Terminal 3 is likely to be a large well-equipped, and managed facility.

From the perspective of the terminal operator, MES is the capacity beyond which there are no more significant unit cost advantages because economies of scale have been exhausted. Empirical evidence suggests that a unique MES might not exist given the observed diversity in terminal scales worldwide. Essentially, one can expect MES variations rather than a unique MES for the entire terminal industry.