Published Mar 3, 2023 External Economies of Scale refer to benefits that come from external sources outside the control of the individual firm. Thus, they can lead to lower costs and increased productivity for all firms in the area. To illustrate external economies of scale, imagine a town that has multiple firms producing similar products. Each firm operates in its own building and does not collaborate with its neighbors. One day, the town decides to build a new highway that connects all of the firms in the area, making transportation and shipping goods easier and more efficient. As a result of this change, the firms in the area experience lower transportation costs and increased supply chain efficiencies. Additionally, being located near other firms in the same industry creates a clustering effect that leads to increased innovation and knowledge sharing. The firms are now able to share machinery, storage and warehousing facilities, and other resources, which can further reduce costs. External economies of scale play a significant role in regional development and growth. As firms in the same industry or related industries locate near one another, they may benefit from shared infrastructure, specialized labor pools, and other resources. This clustering can lead to a virtuous cycle of economic growth and innovation. However, it is worth noting that external economies of scale can also have limitations. If all firms in an area are competing for the same limited resources, they may experience rising costs due to competition. Overall, understanding the concept of external economies of scale is important for policymakers, business leaders, and other stakeholders who are interested in promoting sustainable economic growth and development.Definition of External Economies of Scale
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Why External Economies of Scale Matters
Microeconomics