Excess capacity in weapons production: An empirical analysis∗ †

This paper analyzes a set of observations by the Congressional Budget Office (CBO) on individual weapons systems regarding whether large amounts of excess capacity exist and whether short run average cost (SRAC) appears to be severely decreasing. It is shown that the amount of excess capacity and steepness of SRAC are essentially independent of output rate. It is then argued that this suggests that production is occurring in inefficiently large plants—i.e.—off the long run cost curve.