External Economies Of Scale

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DEFINITION of 'External Economies Of Scale'

The lowering of a firm's costs due to external factors. External economies of scale will increase the productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company, and encompass positive externalities that reduce the firm's costs.

BREAKING DOWN 'External Economies Of Scale'

External economies of scale happen outside the control of a company and will result in a reduction in costs and increases in productivity. For example, before the invention of the automobile, the only way to move heavy freight across a land was rail. When heavy freight was eventually transported by large trucks, companies were able to make shipments across large distances to more remote locations. All companies benefited from this new technology, which was outside of their control.

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