what are external economies of scale 
in economics economies of scale dictate that the more units a business produces the less it costs to produce each unit external economies of scale describe the same phenomenon except as applied to an entire industry rather than within a single 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 this is an example of external economies of scale with external economies of scale 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 the basics of external economies of scalebusinesses 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 economyif 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 pros and cons of external economies of scaleexternal economies of scale have several advantages they include but external economies of scale are not without drawbacks disadvantages include real life example of external economies of scalefrom 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 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 bigger and faster 