External diseconomies are the opposite of external economies of scale, where companies suffer an increase in average costs due to external factors. The increase did not only occur in a specific company but also other companies in the same industry.
In increasing-cost industries, companies experience average product costs that increase when output increases. Because it comes from outside, management has no control over the factors. They cannot avoid an increase in expenses.
Sources of external diseconomies of scale
When the industry expands, various factors raise the costs of all companies and cause external diseconomies of scale. As the industry’s output grows, the demand for production factors increases and leads to more expensive input costs. Land becomes scarce, making rent start to rise.
Poor transportation networks plus increased business activity cause congestion and slow down logistics flows. It also raises costs for all companies. For example, an increase in flights and the number of airlines is causing congestion at the airport. That results in longer waiting times and airport costs for all airlines, which increases average costs.
Low-quality education results in costs as qualified labor become scarce and expensive. Recruiting workers with low education only result in low productivity.
As the industry grows, it also gives rise to negative externalities such as pollution and noise. It raises social costs and incentivizes the government to reduce them, for example, through taxes or regulations, which results in costly consequences for all companies in the industry.
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