Diseconomies

Diseconomies of scale refer to a situation in which rising output leads to higher average costs, reversing the pattern of economies of scale. In the long run, when all factors of production are variable, the long-run average total cost (LRATC) may begin to rise after the firm passes its minimum efficient scale. The concept is used to explain why firms do not endlessly grow; beyond a certain size, additional expansion can raise per-unit costs rather than lower them.

Internal diseconomies of scale arise from coordination and management challenges as organizations become larger, such as bureaucratic overhead, communication problems, delays in decision-making, and labor demotivation. Other contributors include congestion of facilities, longer supply lines, and rising input prices for a larger corporate footprint. Diseconomies of scope occur when producing multiple products together increases costs due to added complexity, marketing, and shared inputs.

External diseconomies occur when the actions of one firm impose costs on others, such as pollution, traffic congestion, or stressed local infrastructure. These external costs are not borne by the expanding firm but by society, often justifying regulatory interventions, taxes, or cap-and-trade systems.

Implications: firms seek an optimal size near the minimum efficient scale to minimize LRATC. Managers may counter diseconomies via decentralization, improved information systems, better incentive structures, or technology that streamlines coordination. The concept is central to theories of firm size and industrial organization.