Differentiate between External Economies and External Diseconomies.

 There are two types of phenomena that owe their names to external economies and external diseconomies. In standard microeconomics and macroeconomics, an external economy refers to a positive externality, and an external diseconomy refers to a negative externality. In economics of the firm, an external economy of scale refers to benefits that arise from general growth in the economy or a specific industry; external diseconomies are extra costs or disadvantages from outside economic forces.

Differences between External Economies and External Diseconomies of Scale-

External Economies of Scale:

A larger industry can enable the firms in that industry to reduce their average costs in a number of ways including developing:

i. A skilled labour force:

A firm can recruit workers who have been trained by other firms in the industry.

ii. A good reputation:

An area can gain a reputation for high quality production. For example, the Bordeaux region of France is well known for its high quality wine production and Maldives has a reputation of being a popular holiday joint.

iii. Specialist suppliers of raw materials and capital goods:

When an industry becomes large enough, it can become worthwhile for other industries, called subsidiary industries to set up for providing for the needs of the industry. For instance, the tyre industry supplies tyres to the car industry.

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iv. Specialist services:

Universities and colleges may run courses for workers in large industries and banks and transport firms may provide services, specially designed to meet the particular needs of firms in the industry.

v. Specialist markets:

Some large industries have specialist selling places and arrangements such as corn exchanges and insurance markets.

vi. Improved infrastructure:

The growth of an industry may encourage a government and private sector firms to provide better road links, electricity supplies, build new airports and develop dock facilities. External economies of scale are more likely to arise if the firms in the industry are located in one area. This is why they are sometimes referred to as economies of concentration.

External Diseconomies of Scale

Just as a firm can grow too large, so can an industry. With more and larger firms in an area, there will be an increase in transport with more vehicles bringing in workers and raw materials and taking out workers and finished products.

This may cause congestion, increased journey times, higher transport costs for firm and possibly reduced workers’ productivity. The growth of an industry may also result in increased competition for resources, pushing up the price of key sites, capital equipment and labour

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