1.

(Internal) Economies of Scale

Economies of scale appear when total average cost of production decreases as the level of
production increases. The reverse relationship holds when diseconomies of scale are
present. Determinants of the precise nature of this relationship may be the technology of
production, the organizational structure of a firm, or possibly the level of expertise in
producing a certain product or service.
Manolis Athanassiou, Wiley Encyclopedia of Management

[Internal] Economy of scale, in economics, the relationship between the size of a plant or
industry and the lowest possible cost of a product. When a factory increases output, a
reduction in the average cost of a product is usually obtained. This reduction is known as
economy of scale. Increased labour supply, better specialization, improved technology, and
discovery of new resources or better implementation of existing ones all can increase
output and lead to economy of scale. Conversely, diseconomy of scale can result when an
increase in output causes the average cost to increase.
https://www.britannica.com/topic/economy-of-scale

2. External Economies of Scale (also known as agglomeration economies)

When the sources of the savings are outside the scope or size of the firm, they are called
external economies of scale. Alfred Marshall (1920) identified three sources of external
economies of scale: input sharing, labor market pooling, and knowledge spillovers.
Terminologies differ, but Marshall’s external economies of scale later also came to be known
as “economies of agglomeration”.
He identified two types of external/agglomeration economies: (a) locational economies, and
(b) urbanization economies.
“localisation economies are benefits because of close localisation of firms belonging
to the same industry in a given area leading to savings on the basis of greater
cooperation in research, lower transportation rates as well as consumption of
special inputs or services.”

For example, it made sense for a new entrepreneur in light engineering firm to
locate in Dholai khal area. Or, new IT firms keep moving to Silicon Valley area in
California (expensive land value the is offset by other savings an IT firm can obtain)

“Urbanisation economies are based on the size or presence of firms of other

industries and/or the city's size and diversity which allows them to share specialised
inputs but also to share public utilities, transportation services and infrastructure.
In fact, the city can offer access to big markets of both products and labour and
provide to the firms located in big cities the advantage of provision of public utilities
and public infrastructure suggesting that there are increasing returns to scale,
according to the city's size.”

3. A collection of definitions of Economies of Agglomeration (along the same theme

as the previous description)

Economies of agglomeration are where a firm gains an advantage from the common
location of other firms (Parr, 2002), such as through knowledge spillovers or producer
linkages (Puga, 2010).

Knowledge spill-over is said to happen when firms can learn from other firms without having
to pay for it.

While intuitively it makes sense that there are savings and advantages to firms from siting
close by, econometric measurement of such savings is not straightforward. For our
purposes (Env 307), we do not need to delve into such analysis.

Another definition:
Agglomeration economies are external economies that stem from the location of firms
belonging to the same or related industrial sectors. It is widely known that firms can fully
take advantage of benefits from industrial agglomerations if they locate close to each other.
-Akihiro Otsuka, Mika Goto, Toshiyuki Sueyoshi

4. Diseconomies of agglomeration

The increase in costs due to density (such as land value, pollution, congestion and crime, phenomena
that frequently are related to overcrowding) are collectively referred to as diseconomies of scale.

This idea makes intuitive sense. It is empirically observable as well (e.g. Dhaka’s
urban core is attracting increasingly fewer number of new firms, and many firms
are moving away).

However, just like economies of agglomeration, diseconomies are hard to measure

econometrically.