Background
External diseconomies of scale refer to the situation where increased industry output leads to higher costs for all firms.
Historical Context
The concept originated from studies on industrial structure and market behaviors, particularly in relation to economies and diseconomies of scale. It became more ingrained in economic thought in the mid-20th century as markets and industries grew more complex due to globalization.
Definitions and Concepts
External diseconomies of scale arise when new firms entering an industry cause the minimum average total cost (MATC) for all existing firms to increase. This typically happens as demand for specialized inputs increases, which drives up their prices. Unlike internal diseconomies of scale, which affect individual firms, external diseconomies impact the whole industry, making the industry’s long-run supply curve upward sloping.
Major Analytical Frameworks
Classical Economics
Classical economics does not specifically address external diseconomies of scale as it focuses more on macroeconomic phenomena like production output and capital accumulation.
Neoclassical Economics
Neoclassical economics incorporates the idea of external diseconomies of scale in its models of market equilibrium and firm behavior. It emphasizes the role of marginal costs and diminishing returns.
Keynesian Economics
External diseconomies of scale are considered in Keynesian theory mainly with respect to how they influence aggregate supply, pricing pressures, and overall economic stability.
Marxian Economics
Marxian economics may interpret external diseconomies of scale in the broader context of capitalist competition and market saturation, where increased entry into industry affects labor costs and capital allocation.
Institutional Economics
This framework considers external diseconomies of scale by examining the role of institutions and regulatory bodies in mitigating or exacerbating these effects.
Behavioral Economics
Behavioral economics may explore how cognitive biases and decision-making affect firm behaviors in dealing with rising costs due to industry expansions.
Post-Keynesian Economics
Post-Keynesian thought expands on how industry structure and cumulative causation can lead to external diseconomies of scale, and how policy interventions might alleviate these issues.
Austrian Economics
Austrian economists would consider external diseconomies of scale through the lens of subjective value, entrepreneurship, and spontaneous order. They emphasize market processes over equilibrium states.
Development Economics
In development economics, external diseconomies of scale may be linked to the limits of industrial expansion in developing countries where infrastructure and input specialization are nascent.
Monetarism
Monetarists might investigate how changes in monetary policy affect interest rates and input prices, influencing external diseconomies of scale.
Comparative Analysis
Comparative analysis within these frameworks can yield insights into regulatory policy, market design, and industry strategy to manage costs effectively and optimize growth.
Case Studies
Examining specific industries, like technology or automotive, can illustrate how external diseconomies of scale manifest in practical contexts, offering lessons on mitigating adverse effects.
Suggested Books for Further Studies
- “The Economics of Industrial Organization” by William G. Shepherd
- “Microeconomic Theory” by Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green
- “Industrial Organization: Theory and Practice” by Joan Woodward
Related Terms with Definitions
- Economies of Scale: Reduction in average cost per unit due to increased levels of production.
- Internal Diseconomies of Scale: Increase in cost per unit that an individual firm experiences as it grows.
- Long-Run Supply Curve: Graph showing the relationship between industry supply and price over time.
- Marginal Cost: The cost to produce an additional unit of output.
- Aggregate Supply: Total supply of goods and services in the economy at a given overall price level.