External diseconomies of scale

External diseconomies of scale are known as the problems and disadvantages faced by the entire
industry rather than just one company. The average cost of production will raise. It represented by the
long run average cost curve move upwards.

Reasons for external diseconomies of scale

First and foremost, the reason for external diseconomies of scale is concentration problems. When firms
are concentrated in one area, there will cause traffic problem. For example, the road may become
congested and cause transportation cost become higher. In addition, there will be delays in
transportation of raw material and lead to a decline in productivity. When it takes an extra hour to
deliver products to the store, the shipping fees will increase. Finally, the cost of production will increase.
Besides, when firms are concentrated in one area, there will also cause pollution problem. For example,
some factories will build close to each other in order to work efficiency. However, the factories will
pollute the environment. For the worker, the polluted environment is a health hazard. The factories
need to have extra cost to hire a worker who wants work in there. Therefore, the social cost of
production rises.

Moreover, scarcity problem is one of the reasons for external diseconomies of scale. With the
development of the industry, the companies will compete in obtaining raw materials and land area. The
industry will keener competition among the firms for the raw materials of production. Hence, the
industry will hard get cheaper raw materials from the supplier. There will cause the price of each raw
materials rise and lead to increase in costs of production. Besides, there needs a large area for build the
factories of the industry. The competition for land will cause the prize of land increase led to higher cost
for the acquisition of land. Hence, the cost of production will increase. If there have not enough area for
the factories, the productivity of the factories will reduce. As a result, the quantity of goods will not
enough for the demands of the market.

Furthermore, the next reason for external diseconomies of scale is wage problem. When there is a lack
of a well-trained labor force, wage problems will arise in the industry. Due to the limited resources, each
firm are needed to provide higher salary for the labour than other. There will cause the variable cost to
become higher. For example, when the skilled labours are clearly in short supply, the companies will be
difficult to attract them with a limited supply. Hence, the companies must offer higher salaries to attract
new workers. In addition, some company will provide higher salary to prevent the existing workers from
moving to another firm. As a result, if a company refusal to raise salary the company will have not
enough worker and lead to lower productivity of the company.
https://www.economicsdiscussion.net/production/diseconomies-of-scale-of-production-internal-and-
external/6912

https://www.economicsdiscussion.net/india/industries-india/over-concentration-of-industries-
problems-and-measures/19199