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.

Externalities and Third-Party Effects

An external economy (positive externality) occurs when one person or business confers benefits on others for which it is not immediately feasible to charge. In other words, a valuable service is probably being underproduced because the creators of the benefit are not being sufficiently compensated.

Likewise, an external diseconomy (negative externality) occurs when a person or business imposes some cost or hardship on others without having to (or being able to) compensate them. The classic example is a factory that has a smokestack that is dirtying the property of those living nearby. In this case, it isn't economically feasible to go around and compensate individual property owners for the cost of exposing them to particulate matter.

Externalities are theoretically easy to explain yet practically very difficult to measure.

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Diseconomies of Scale

External Economies and Diseconomies of Scale

Suppose that a new, low-cost education and training program is introduced for electrical engineers. This would increase the productivity, lower the training costs, reduce liabilities and probably raise the profits of all employers of electrical engineers, whether or not they had anything to do with the training program.

This is known as an external economy of scale. A net benefit occurs that makes it easier to produce goods and services across an entire industry or geographic region.

The inverse can also happen. Any industry-wide effects that make it more difficult or more costly to perform business operations is called an external diseconomy of scale. Common examples include taxes, regulations or resource constraints.