Chillin'Competition

The mainstream theory goes like this: scale effects, or scale economies, are a source  of productive efficiency. In increasing output, firms active in sectors with high fixed costs (FC) manage to lower average total costs (ATC). This is because FC can be spread over a larger quantity of output. When firms with high fixed costs produce a lot, the share of the FC that bears on each produced unit (the average fixed cost, AFC) decreases, and in turn, so does the ATC .

Now, besides this, achieving economies of  scale may have adverse, long-run, side-effects  on productive efficiency. Because the fixed resources are more intensively used – think of a truck, a network, an engine, that is intensively solicited to deliver greater output – a number of new costs might in turn be incurred as a result of the decision to increase production scale. The truck, network, engine might suffer technical damage, dysfunction, require more maintenance, etc. as a result of its increased use.  It may have to be replaced more rapidly. There are also opportunity costs arising from the decision to use existing capacity to produce more.

What is relatively interesting is that scholars often talk of economies of  scale as something plainly positive. The negative side-effects of economies of scale might however be significant. I am not cognizant of any literature on this (and have not done the research yet), but would welcome references on this.

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