Answer to Question #123117 in Macroeconomics for abhijit

Question

Suppose that applying fertiliser to a crop in a particular region results in water pollution in a nearby water body, and that the pollution is of concern to the community. We could identify two different "optimal" fertiliser rates: one that is optimal from the perspective of the community as a whole (considering pollution) and one that is optimal for the farmer (ignoring pollution). How do these two rates compare?

Answer 1

An economy of scale is a microeconomic term that refers to factors driving production costs down while increasing the volume of output.

There are two types of economies of scale: internal and external econony of scale. Internal economies of scale are firm-specific or caused internally while external economies of scale occur based on larger changes outside the firm. Both result in declining marginal costs of production, yet the net effect is the same.

The difference between internal and external economies of scale. Is that there is decline in factors of production such as land, labor, and effective capital represented a positive externality for all firms.

These externality arguments are offered in defense of public infrastructure projects or government research.