External Diseconomies

External Diseconomies 

Definition: This situation happens when firms experience rising long –run average cost when the industry expands beyond a particular limit.

Types of External Diseconomies are explained as follows

a) Rise in the price of factor input

As the industry expands, there will be rising and competing demand for the scarce factor input which will result in the higher factor prices or cost of the production.

b) Externalities

Measures adopted by the government such as. tax or fine to reduce the externalities may actually raise the cost to the firms when the industry expands.

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