External diseconomies of scale
External diseconomies refer to increased production costs that lie outside a company’s control.Here, are the three types of external diseconomies of scale:
1. Diseconomies of pollution
Diseconomies of pollution occur when industries expand and create additional costs for a local population. Larger facilities can create additional costs in the form of pollution. While pollution isn’t a direct cost that may affect a company, it can cause societal inefficiencies that may cause workforce challenges.
Air pollution can cause poor respiratory health and other long-term side effects. Similarly, water and soil pollution can pose a risk to health. Therefore, the employees who live within proximity to the facilities may experience higher health costs.
If levels of pollution reach a critical mass, the land and housing within the vicinity of the company’s facility could lose value. This could create a financial loss for those employees and locals who own property and real estate within the facility’s vicinity when they want to sell their assets.
2.. Limited natural resources
Most production processes require a certain amount of natural resources to function properly. These resources may include labor, land or extracted resources, like coal, oil, gold or electricity.
When companies expand, their production process creates an increase in demand for natural resources. Since natural resources often have limited quantities, higher demand can stress the existing resources, making them rarer and more expensive.
For example, skilled laborers are typically in short supply. Therefore, if a company must only hire skilled laborers to work in their facilities, they may have to pay higher salaries to attract such employees. With this, the cost of production increases.
If a company must extract coal for their production processes, there is typically only a fixed supply of coal in an area. As the company extracts more coal, the finite supply decreases, increasing the both price of locally sourced coal and the difficulty of finding coal to extract.
3. Infrastructure diseconomies
Infrastructure diseconomies occur when companies expand to where they create tensions for local infrastructure. For example, if a company hires more employees at a high rate, roads or public transport that employees use to commute may become congested.
Further, if a company contracts truck drivers or other freight operators to pick up or deliver goods, these vehicles could overwhelm the local infrastructure as well. Situations like these dictate higher production costs because of inefficiencies like increased delivery time and employee commute time.
