Economics • Economic BasicsMedium
Which of the following best defines 'External Economies of Scale' in production theory?
A. Cost reductions achieved by a single firm by expanding its own plant size and internal management capacity
B. Cost reductions enjoyed by an individual firm due to the growth and development of the entire industry or region✓ Correct Answer
C. Efficiency gains realized through multinational expansion and diversification into international markets
D. Profit margins generated by externalizing pollution costs onto the general public without taxation
💡 Solution & Explanation
External economies of scale refer to cost savings that benefit all firms within a particular industry due to external factors like regional infrastructure growth, specialized labor availability, and shared technological advancements. Internal economies are achieved solely through an individual firm expanding its own production scale and managerial efficiency. These external benefits shift the long-run average cost curve downward for every firm in that industry. Alfred Marshall pioneered the economic analysis of industrial localization and external economies.
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