DEFINITION of 'External Diseconomies of Scale'

External diseconomies of scale are the result of outside factors beyond the control of a company increasing its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production.

BREAKING DOWN 'External Diseconomies of Scale'

Factors of production are the inputs that firms use in order to produce output. The inputs include land, labor and capital. Some economists include entrepreneurship as well.

For example, there might be a manufacturer of "widgets" operating in a given city. If the average wage level increases across all other markets as a result of an increased demand for labor, the manufacturer must pay higher wages to entice workers to produce those "widgets." These factors would raise the total costs for the manufacturer.

Causes Behind External Economies of Scale

The introduction of additional competitive rivals in a given industry is sometimes pointed to as a key factor in external diseconomies of scale. As more companies compete for the same workforce, the salaries each company offers may need to increase in order to attract the needed personnel.

This differs from internal influences such as the size of the company. It is possible that a business could grow so large that it must raise prices to accommodate its elevated infrastructure and logistics costs.

Certain industries that rely on access to materials that become more difficult to come by may face external diseconomies of scale. For instance, as more and more fossil fuels are expended, petroleum companies may be forced to search for this resource in harder to reach locations. This can include drilling deeper and deeper underground and exploring the use of alternative fuel sources, all of which can require a considerable outlay of financing. That can include additional work hours, more equipment, and dealing with securing access to new areas where oil may be found. The harder it becomes to find this resource, the higher the costs will rise in order to tap into it.

An industry-wide change in primary materials used in the production of goods and services can also lead to such diseconomies of scale. The electronics industry, for example, adopted new formats and components with the introduction of flat screen, high definition televisions. The move away from cathode ray tube hardware meant establishing new manufacturing techniques in order to remain competitive. Prices for the first flat screen, high-definition televisions were higher than their dated counterparts not only because the older technology was being rendered obsolete. The time and cost to produce these new models carried higher expenses that the product makers were compelled to pass along to their customers.


  1. Diseconomies of Scale

    Diseconomies of scale occur when a business expands so much that ...
  2. External Economies Of Scale

    External economies of scale are the lowering of a firm's costs ...
  3. Minimum Efficient Scale

    The minimum efficient scale is the least amount of production ...
  4. Scalability

    A characteristic of a system, model or function that describes ...
  5. Factor Market

    A factor market is a marketplace for the services of a factor ...
  6. Pigovian Tax

    A Pigovian tax is a strategic effluent fee assessed against businesses ...
Related Articles
  1. Insights

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  2. Small Business

    Understanding Externality

    An externality is a consequence of an economic activity that is experienced by unrelated third parties.
  3. Managing Wealth

    Is Pressing The Trade Just Pressing Your Luck?

    Scaling up into a trade can be a lucrative strategy, but you need to understand the risks involved.
  4. Insights

    Factors Of Production

    Factors of production is an economic term describing the general inputs used to produce goods and services to make a profit. Under the classical view of economics, the factors of production consist ...
  5. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  6. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  7. Investing

    Explaining Economies Of Scale

    Is bigger always better? Learn about the important and often misunderstood concept of economies of scale.
  1. What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become ... Read Answer >>
  2. What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and ... Read Answer >>
  3. How do modern companies assess business risk?

    Find out how modern companies assess and mitigate business risks, how those risks can be identified and categorized, and ... Read Answer >>
  4. Why are the factors of production important to economic growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  5. How Are Bonds Rated?

    A bond rating is a grade given to a bond by various rating services. Learn how the major rating services evaluate an issuer's ... Read Answer >>
Trading Center