What Are External Economies of Scale?

External economies of scale occur outside of an individual company but within the
same industry. Remember that in economics, economies of scale mean that the
more units a business produces, the less it costs to produce each unit.

External economies of scale describe similar conditions, only for an entire industry

instead of a company. For example, if a city creates a better transportation network
to service a particular industry, then all companies in that industry will benefit
from the new transportation network, and experience decreased production costs.

As an industry grows larger or becomes clustered in one location—as with, say, the
banking and financial services in New York or London—than the average costs of
doing business within that industry over the long run become lower, and we have
external economies of scale. With external economies, costs also may fall because
of increased specialization, better training of workers, faster innovation, or shared
supplier relationships. These factors are typically referred to as
positive externalities; industry-level negative externalities are called
external diseconomies.

KEY TAKEAWAYS

 External economies of scale are business-enhancing factors that occur

outside a company but within the same industry.
 In addition to lower production and operating costs, external economies of
scale may also reduce a company's variable costs per unit because of
operational efficiencies and synergies.
 On the downside, external economies of scale could dull the competitive
edge of a company, as it cannot exclude competitors from benefiting also.
The Basics of External Economies of Scale
Businesses in the same industry tend to cluster in together. For example, a film
studio might determine that California is a particularly good location for year-
round film-making, so it moves to Hollywood. New movie producers also move to
Hollywood because there are more camera operators, actors, costume designers,
and screenwriters in the area. Then, more studios might decide to move to
Hollywood to take advantage of the specialized labor and infrastructure already in
place, thanks to the success of the first firm.

As more and more firms succeed in the same area, new industry entrants can take
advantage of even more localized benefits. It makes sense for industries to
concentrate in areas where they are already strong.

An agglomeration economy, or synergy, is when businesses in different industries

are beneficial to each other and can share resources and opportunities.
Agglomeration Economy
If two or more separate industries are incidentally beneficial to one another, there
can be external economies of scale across the entire group. This phenomenon is
sometimes called an "agglomeration economy," in which businesses are located
close to one another and can share resources and efficiencies. It is similar to the
business governance concept of synergy.

Scale economies that occur outside of a company, but from which all companies in
an industry benefit could include the following:

 New production methods

 Transportation modes
 Government tax breaks
 Increased tariffs against a foreign competitor
 New off-label use of a prescription drug or other product
Pros and Cons of External Economies of Scale
External economies of scale have several advantages. They include the following:

 Egalitarian: All of the businesses in an industry enjoy these economies of

scale equally.
 Growth: External economies of scale can drive industry growth in particular
regions and can also encourage the rapid economic development of support
industries and the entire city or geographic area in general.
 Lower costs: In addition to lower production and operating costs, economies
of scale may also reduce variable costs per unit because of operational
efficiencies and synergies.

But external economies of scale are not without drawbacks as well. These
disadvantages include:

 Lack of control: Individual firms have no direct control over what happens
externally. In particular, this means that a company would not have
a competitive edge, as it cannot exclude competitors from benefiting also.
 Limited locations: External economies of scale may develop so strongly in
one geographic region that it becomes difficult for companies in a certain
industry to locate anywhere else.
 Company instability: A business might not be able to exploit existing
external economies because of its internal shortcomings, such as poor
management, or other circumstances.

Real-Life Example of External Economies of Scale

From the late 1960s to the early 1990s, the arguable epicenter of the U.S. high-tech
sector was a region just outside of Boston. It was known as Route 128, named for
the freeway that ringed the city, and around which a cluster of technology
companies grew—including those in the burgeoning computer business.
A variety of factors enticed entrepreneurs there, including proximity to
corporations and educational institutions with their research centers and talent,
financial services and venture capital firms, and military bases. And the more
businesses that came, the more external economies of scale developed, making it
easier for more ventures to find facilities, skilled labor, suppliers, sub-contractors,
and support services—and to markets themselves, staging conventions and
conferences

Interestingly, toward the end of the 20th century, Route 128 was eclipsed as the
center of the high-tech industry by Silicon Valley in the San Francisco Bay Area,
where the external economies of the scale grew—as things in California tend to do
—bigger, faster, and on a grander scale.

How does economies of scale reduce cost?

Economies of scale are cost advantages reaped by companies when production
becomes efficient. Companies can achieve economies of scale by increasing
production and lowering costs. This happens because costs are spread over a
larger number of goods. Costs can be both fixed and variable
What causes external economies of scale?
External economies of scale happen because of larger changes within the
industry, so when the industry grows, the average costs of business drop.
Internal economies of scale offer greater competitive advantages because
an external economy of scale is shared among competitors
Agglomeration economies
Agglomeration economies or external economies of scale refer to the benefits from
concentrating output and housing in particular areas.

If an area specialises in the production of a certain type of good, all firms can
benefit from various factors such as:
 1. Good supply networks
2. Supply of trained workers
3. Infrastructure built specifically for the industry
4. Good transport links.
Due to agglomeration economies, people and firms often concentrate in particular
areas. For example, people tend to move to cities where is there is a greater choice
of jobs, social activities and specialist services

However, there is always the risk of dis-economies of scale, where firms become
too big and average costs start to rise.

Examples of agglomeration economies

Silicon Valley. IT setups tend to cluster in similar regions, such as Silicon Valley
California, and major cities, like London. The reason is that these areas attract
highly skilled IT personnel and it is easier to recruit the right staff. Also, the
support infrastructure will surround the areas. There will be a competitive market
for designers, software engineers, and proofreaders.
West Midlands car industry. In the UK, the West Midlands around Birmingham
became an important hub for car production in the UK. Around this area developed
good transport links and firms servicing the industry with spare parts.
Chinese clothing manufacturers. China has seen a strong growth in
manufacturing industries on the south-east coast. These areas have good transport
links for exporting to the rest of the world. Also, the areas have attracted migrant
flows from northern China, enabling wage costs to remain low.
Importance of agglomeration economies

 Small initial differences may lead to industries setting up in particular

industries, which means other firms want to set up in the same location
  If industry is concentrated in a particular region, then industrial decline can
become more problematic.
Related
 Economies of scale
 Dis-economies of scale
 External economies of scale

Localization and Urbanization Economies  are two types of

external economies of scale, or agglomeration economies. ... Urbanization
economies  arise when the size of the city leads to an increase in productivity. Los
Angeles exemplifies urbanization economies in that it has no single dominant
industry, yet continues to grow

What is agglomeration theory?

The basic concept of agglomeration economies is that production is facilitated
when there is a clustering of economic activity. The existence
of agglomeration economies is central to the explanation of how cities increase in
size and population, which places the phenomenon on a larger sc
Types of agglomeration economies . We begin by distinguishing among the
three types of agglomeration economies that may prove beneficial for innovation
depending on the type of co-located firms, namely, urbanization economies,
localization economies, and knowledge-intensive economies

3. What are forward and backward linkages in agriculture?

Backward production linkages refer to linkages from the farm to the part of the
non-farm sector that provides inputs for agricultural  production, for example
agro chemicals. 
Forward production linkages refer to the part of the non-farm sector that
uses agricultural output as an input
What is backward and forward linkages of industries?
A forward linkage is created when investment in a particular project encourages
investment in subsequent stages of production.
A backward linkage is created when a project encourages investment in facilities
that enable the project to succeed. Normally, projects create
both forward and backward linkages

Forward and backward linkages in food processing

Body: Forward linkage integration refers to consolidating the chain

from processing industries to market while backward market integration refers to
consolidating chains from farm to processing centres and to integration with
ancillary industries

The Economic Linkage Effects of Food Processing Industry

Linkages is a phenomenon which measures the capability of an industry to

generate demand for the products of the other industries. Form the point of view of
development strategy, linkages are one of the essential feature of an industry.
Linkages are of three types: Forward, Backward and sideways.

Forward Linkage: It is when, the establishment of a processing industry can lead

to the development and establishment of the number of advanced stage industries.
Example, Forest Industry, when established as a base industry, results in
establishment of vast number of advanced processing industries like:
manufacturing of paper, paper bags, stationary, boxes made of paper, cartons,
wooden boxes etc.

There are many other examples: products such as vegetable oils and rubber are
used in a wide variety of manufacturing industries; based on the preparation of
hides and skins, tanning operations can be started, as can the manufacture of
footwear and other leather goods.

Backward Linkage: The feedback effects generated by a base industry on the

development of the base sector is called backward linkage. The development of the
food processing industry has many feed back effects on the agriculture sector itself.

For Example, once a food processing industry is established, it results in increasing

the demand of raw materials provided by the agriculture sector. The establishment
of processing facilities is itself an essential first step towards stimulating both
consumer demand for the processed product and an adequate supply of the raw
material.

The provision of transport, power and other infra-structural facilities required for
agro-industries also benefits agricultural production. The development of these and
other industries provides a more favourable atmosphere for technical progress and
the acceptance of new ideas in farming itself.

Sideways Linkage: Sideways linkages are mostly derived from the use of by

products and waste products of the main base industrial activity. For example:
many food processing industries using agriculture raw materials produce waste that
can be used further in production of fuel, bio-fuels, paper pulp and fertilizer. The
production of sugar results in production of molasses as a waste product, which is
used by the Alcohol Brewing industry in the production of ethanol.

The capacity of Food Processing industry to generate demand and employment in

other industries is the important aspect of the processing industry. It works because
of processing industry growing potential for activating backward, forward and
sideway linkages.
The Food Processing Industry and Economic Development

Backward Channel

Forward Channel.

Efficiency vs Equity
30 November 2019 by Tejvan Pettinger
A big issue in economics is the trade off between efficiency and equity.

 Efficiency is concerned with the optimal production and allocation of

resources given existing factors of production. For example, producing at the
lowest cost. See: Different types of efficiency
 Equity is concerned with how resources are distributed throughout society.
1. Vertical equity is concerned with the relative income and welfare of the
whole population e.g. relative poverty when people have less than 50% of
average income. Vertical equity is concerned with how equitably resources
are distributed and may imply higher tax rates for high-income earners.
2. Horizontal equity is treating everyone in the same situation the same. e.g.
everyone earning £15,000 should pay the same tax rates.

Efficiency may lead to less equity

The poll tax

The Community Charge (Poll tax) was a tax on every individual. Each individual
paid the same amount – regardless of their income. It was considered to be
economically efficient because a poll tax doesn’t distort economic behaviour. It
has no impact on incentives to work because if you earn more, the tax you pay
remains the same. However, by making a millionaire pay the same tax as a poor
pensioner, it was considered to be unfair.

Cigarette taxes

A tax on cigarettes can be said to increase social efficiency. Cigarettes have

negative externalities causing the social cost to be higher than personal cost. The
cigarette tax makes people pay the full social cost of smoking and increases social
efficiency. However, a cigarette tax is also highly regressive. It takes a bigger
percentage of income from low-income earners.
Pareto efficiency
Pareto efficiency is concerned with creating a situation where we cannot make one
party better off without making another party worse off. For example, a country
may devote 60% of GDP to the manufacture of armaments. In doing this, they may
achieve technical and productive efficiency and produce on their production
possibility frontier. Therefore from this perspective, they are efficient. But, such an
economy may have a great deal of inequality, with large portions of the population
struggling to have enough to eat.
Pareto efficiency is a point on the PPF curve, but there is no guarantee this will
lead to an efficient outcome.
Bank bailouts and equity

From one perspective we may say bailing out banks is an economic necessity as it
prevents a collapse in confidence in the banking system. By bailing out banks, we
enable a more productively efficient economy.

However, from another perspective, it seems unfair that the government enables
bankers to retain high paying jobs whilst they implement cuts for workers on
lower-income.

Increased inequality and increased growth

Sometimes, economic policies create a situation where everyone becomes better

off (rising real incomes across the population). However, those on high incomes
gain a bigger percentage rise in real incomes. The result is that everyone becomes
better off, but there is also greater income inequality. Therefore, some people may
feel that relatively they appear worse off compared to others in society.

This is a pareto improvement in economic welfare but also an increase in

inequality.

It is like the ‘trickle-down effect‘ – where the poorest only gain a small increase in
their income. Whilst the rich gain a big percentage and bigger absolute increase in
income. There is increased economic efficiency but increased inequality.
Is it good to have increased efficiency but increased inequality?

Yes
 Reduction in absolute poverty.
 Increase in real incomes – everyone is better off.
 Some feel that inequality creates incentives to work harder.
No
 People value happiness in terms of ‘fairness’ and relative perspectives. If the
rich gain a bigger share of national income, it may create resentment.
  Diminishing marginal utility of income. Rich struggle to spend their
increased income on goods which increase utility.
The final point is that there doesn’t have to be a trade-off between equality and
efficiency. An improvement in efficiency should generally make the economy
better off. There is no reason why improved efficiency has to lead to inequality. It
is compatible to improve both efficiency and equity within society.

Related
 Efficiency vs Equality
 Economic growth and inequality

What is a growth pole?

 Growth poles  are simultaneous, coordinated investments in many sectors to
support self-sustaining industrialization in a country. They bear resemblance
to, but are not the same as, special economic zones (SEZs), which are
spatially delimited areas within an economy
  the concentration of highly innovative and technically advanced industries
that stimulate economic development in linked businesses and industries.
What is growth pole and growth Centre?

 Growth Poles Theory. The central idea of the growth poles theory is that
economic development, or growth, is not uniform over an entire region, but
instead takes place around a specific pole (or cluster)
 The growth centre performs as centre of economic, social and cultural
activities in the rural areas. These are the venues where people exchange
their ideas with their neighbours regarding improved methods of production
and marketing and also serve as centre of recreation

The Growth Pole theory of Francois Perroux and Boudeville

The growth pole theory was developed by French regional economist, Francois
Perroux, in 1955. He was concerned with the phenomenon of economic
development and with the process of structural change.

He attempted to explain how modern process of economic growth deviated from

the stationary conception of equilibrium growth. His arguments were based on
Schumpeter’s theories of the role of innovations and large-scale firms.

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In Schumpeter’s analysis, development occurs as a result of discontinuous spurts in

a dynamic world. The cause of discontinuous spurts is the innovative entrepreneur
whose activities take place in large- scale firms. These firms are able to dominate
their environment in the sense of exercising reversible and partially reversible
influences on other economic units by reason of their dimension and negotiating
strength, and by the nature of their operations.

Scale of operations, dominance and impulses have close relationship to innovate.

This is the most important feature of Perroux’s theory and leads to the concepts of
dynamic propulsive firm and leading propulsive industry. The dynamic propulsive
firm is relatively large and belongs to a relatively fast growing sector. It has a high
ability to innovate and intensity of its interrelation with other sectors of the
economy is important enough for the induced effects to be transmitted to them.

A leading propulsive industry has highly advanced level of technology and

managerial expertise, high income elasticity of demand for its products, marked
local multiplier effects and strong inter-industry linkages with other sectors. There
are two types of linkage—forward linkage and backward linkage. In backward
linkage, an industry encourages investment in the earlier stages of production by
expanding its demand for inputs.
In case of a forward linkage, an industry encourages investment in the subsequent
stages of production either by transmitting innovation or effects of innovations
forward. As a result of innovations, costs of production in the industry decline. It
results in a fall in the price of its output. In this condition, the demand for this
industry’s output by those industries which use its output as input, will increase.

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Perroux’s theory is based on Schumpeterian theory of development and theory of

inter-industry linkages and industrial interdependence. According to him, “Growth
does not appear everywhere and all at once, it appears in points or development
poles, with variable intensities, it spreads along diverse channels and with varying
terminal effects to the whole of the economy”. It is related to Perroux’s idea of an
economic space as a field of forces consisting of centres, “from which centrifugal
forces emanate and to which centripetal forces are attracted. Each centre, being a
centre of attraction and repulsion, has its proper field which is set in the field of
other centres.”

Boudeville gave a regional character and a specific geographic content to

Perroux’s conception.

The growth pole theory received a specific geographical and regional importance
because of Boudeville. He defined a regional growth pole as a “set of expanding
industries located in an urban area and including further development of economic
activity throughout its zone of influence.” The place where these ‘expanding’ or
‘propulsive’ or ‘dominant’ industries are located in the region becomes the pole of
the region and agglomeration tendencies are promoted.

The external economies are basically of three types:

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1. Economies internal to the firm:
These are the economies which any single firm by its own organisation and effort
can enjoy.

2. Economies external to the firm but internal to the industry:

There are related with localisation of industry. As industry expands at a particular
location, cost per unit of output to a firm declines.

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3. Economies external to the industry but internal to the urban area:

These are urbanisation economies. They include development of urban labour
markets, access to a large market, and provision of a wider range of services

Advantage of Growthe pole , As the first part of the chapter explains, the
underlying assumption about the benefits of growth poles is that they increase
market size so that it becomes profitable for firms to invest. Private-sector
investments, in turn, lead to more jobs, higher wages, and economies of scale

Disadvantages: Impossibility to consider any mechanism of intra- regional

agglomeration economies, thus forgetting whatever it was put forward in
location theory, like the importance of physical proximity in growth mechanisms.
Space is a container of growth, with no role in economic trajectories

Regional Planning:

Regional planning is a process of placement of land use activities, infrastructure

and others across an extensive land area usually larger than an individual town or
city. It refers to the planning that takes place in an area that has same economical
and environmental conditions
Merits and Demerits of Regional Planning Paper 201, unit -1 By Dr. Bhawana
Nigam Dept of Geography, A N College Patliputra University, Patna.

The concept  Regional planning is the process which takes into account the
growth and development of a region taking into account its natural and human
resources.  The concept has been used after world war II when many countries
became independent after prolong slavery.  The concept gain more importance
when it was realised that one centralised planning process is not good enough for
different physiographic and human resource of a large country.  therefore there
was a need arises for local, solution based planning process at regional level for
maximum and optimum result.

The merits of Regional Planning All the regions don not have same habitability
conditions for living therefore regional planning helps in improving conditions.
Regional planning is the most desirable way by the world communities to resolve
the critical problems faced by certain region of the world. To solve the problem of
regional imbalance due to increasing population and resource relationship.

Helps in the rapidly increasing population mobility (due to increase in traffic and
means of communication) and rapidly changing space relationship. It helps to
cope with the emerging regional (imbalance) differences due to different level of
technological and economical development in the different parts of the world.
Demerits/ limitations of regional planning.  The regional planning has been
done for longer period of time in the future therefore the planner has to wait for
being able to see the region getting transformed.  Sometimes the pre-requisite for
the success of a special regional plan that may change during the implementation
of a regional plan for example – NCR of Delhi/ India.  Peoples expectations that
regional planning seeks to resolve all problems of the concerned region are most
likely to be unsuccessful . There may be conflicting interest of planners and the
political representatives of the region concerned. Comprehensive regional
planning by nature is difficult to conduct. The planner himself is quite sure of its
efforts and forsighted plans ; but all the other who are support staff are rarely
committed to the cause of planning. Reference  Google scholar  National digital
library  Regional planning in India – by Mahesh Chand and Puri  Regional
planning and development – by R C Chandana.  THANKS.

Region

Advantages :

As it is one language, people become unified. Many goals within a given region
can be accomplished soon

The Disadvantages:

In India, our states were divided on the basis of language which was wrong in view
of the fact that many different languages were spoken in a given region. This led to
narrow minded view in many states.

In a multi cultural, multi lingual, multi religious, multi ethnicity, regionalism is

extremely wrong. It gives a chance for the people to break away from the main
country.

The Kings before Independence ruled India better than today's politicians. They
developed a society which would tolerate all religions and languages. They would
have only 2 language schools based on how many people spoke which language.