In this paper we analyse optimal sizing of grid connected rooftop photovoltaic systems from a household's perspective. We estimate the profit maximizing size for more than 800 households in Austria for various electricity tariffs and subsidy schemes considering economies of scale related to the investment costs of photovoltaic systems in the size range of 1-20 kW of installed capacity. Size dependent investment costs are estimated from data on photovoltaic systems installed in Austria from 2008 to 2013. We then take a social cost perspective and relate the results to the total investment costs to install a certain amount of capacity in residential areas. We find that in the presence of economies of scale substantial cost inefficiencies can occur resulting from incentives to install relatively small systems. Depending on the compensation scheme the simulated optimal system size can be as low as 2 kW resulting in high costs per capacity. Subsidy design and tariff regulations can be adopted to incentivize larger photovoltaic systems in the residential sector which would reduce the costs of achieving a certain level of distributed PV generation. It is estimated that for a minimum system size of 5 kW total investment costs for subsidised residential photovoltaic systems in Austria from 2008 to 2013 could have been 2.2% lower for the same amount of installed capacity. We further argue that the strict focus on onsite use of electricity from photovoltaic systems in the residential area is not necessarily desirable from a social cost perspective because it can lead to small and therefore more expensive photovoltaic systems. (C) 2016 Elsevier Ltd. All rights reserved.