what are diseconomies of scale 
diseconomies of scale happen when a company or business grows so large that the costs per unit increase it takes place when economies of scale no longer function for a firm with this principle rather than experiencing continued decreasing costs and increasing output a firm sees an increase in costs when output is increased investopedia michela buttignolunderstanding diseconomies of scalethe diagram below illustrates a diseconomy of scale at point q this firm is producing at the point of lowest average unit cost if the firm produces more or less output then the average cost per unit will be higher to the left of q the firm can reap the benefit of economies of scale to decrease average costs by producing more to the right of q the firm experiences diseconomies of scale and an increasing average unit cost special considerationsdiseconomies of scale specifically come about due to several reasons but all can be broadly categorized as internal or external internal diseconomies of scale can arise from technical issues of production or organizational issues within the structure of a firm or industry external diseconomies of scale can arise due to constraints imposed by the environment within which a firm or industry operates essentially diseconomies of scale are the result of the growing pains of a company after it s already realized the cost reducing benefits of economies of scale the first is a situation of overcrowding where employees and machines get in each other s way lowering operational efficiencies the second situation arises when there is a higher level of operational waste due to a lack of proper coordination the third reason for diseconomies of scale happens when there is a mismatch in the optimum level of outputs within different operations types of diseconomies of scaleinternal diseconomies of scale involve either technical constraints on the production process that the firm uses or organizational issues that increase costs or waste resources without any change to the physical production process technical diseconomies of scale involve physical limits on handling and combining inputs and goods in process these can include overcrowding and mismatches between the feasible scale or speed of different inputs and processes diseconomies of scale can occur for a variety of reasons but the cause often comes from the difficulty of managing an increasingly large workforce an overcrowding effect within an organization is often the leading cause of diseconomies of scale this happens when a company grows too quickly thinking that it can achieve economies of scale in perpetuity if for example a company can reduce the per unit cost of its product each time it adds a machine to its warehouse it might think that maxing out the number of machines is a great way to reduce costs however if it takes one person to operate a machine and 50 machines are added to the warehouse there is a good chance that these 50 additional employees will get in each other s way and make it harder to produce the same level of output per hour this increases costs and decreases output sometimes diseconomies of scale happen within an organization when a company s plant cannot produce the same quantity of output as another related plant for example if a product is made up of two components gadget a and gadget b diseconomies of scale might occur if gadget b is produced at a slower rate than gadget a this forces the company to slow the production rate of gadget a increasing its per unit cost organizational diseconomies of scale can happen for many reasons but overall they arise because of the difficulties of managing a larger workforce several problems can be identified with diseconomies of scale first communication becomes less effective as a business expands communication between different departments becomes more difficult employees may not have explicit instructions or expectations from management in some instances written communication becomes more prevalent over face to face meetings which can lead to less feedback another drawback to diseconomies of scale is motivation larger businesses can isolate employees and make them feel less appreciated which can result in a drop in productivity external diseconomies of scale can result from constraints of economic resources or other constraints imposed on a firm or industry by the external environment within which it operates typically these include capacity constraints on common resources and public goods or increasing input costs due to price inelasticity of supply for inputs external capacity constraints can arise when a common pool resource or local public good cannot sustain the demands placed on it by increased production congestion on public highways and other transportation needed to ship a firm s products is an example of this type of diseconomy of scale as output increases the logistical costs of transporting goods to distant markets can increase enough to offset any economies of scale a similar example is the depletion of a critical natural resource below its ability to reproduce itself in a tragedy of the commons scenario as the resource becomes ever more scarce and ultimately runs out the cost to obtain it increases dramatically price inelasticity of supply for key inputs traded on a market is a related cause of diseconomies of scale in this case if a firm attempts to increase output it will need to purchase more inputs but price inelastic inputs will mean rapidly increasing input costs out of proportion to the increase in the amount of output realized 