Rural depopulation has put in question the economic viability of many rural institutions. This paper discusses a number of the important conceptual issues that need to be considered when examining the economics of one group of rural institutions, namely schools. Measurement of educational output in particular is fraught with many difficulties. The paper then presents some estimates of cost functions for primary schools in rural areas of New South Wales. The approach combines conventional statistical methods of deriving cost functions with synthetic procedures based on the technology of schooling. It is found that economies and diseconomies of size do exist with respect to certain costs, but it is not clear whether savings can be realized from consolidation of schools, due to the existence of extra pupil transport costs resulting from consolidation.