Figure 5.10 (earlier) indicated decreasing returns to scale at levels of output beyond Q1.
It could be argued that there is no inherent reason why firms must experience such diseconomies,
as technical scale economies could continue so long as the firm is able to
employ more of all resources. However, the prime causes of scale diseconomy are said to
be problems encountered in efficiently managing large organisations. Some of the concerns
previously noted and addressed in a smaller firm might now go unnoticed or be
only partially solved in a larger firm. Or the management structure might become overly
bureaucratic, preventing swift and efficient decision making: in effect, too much ‘red
tape’. It is even possible that with the additional management layers needed to organise
an increasingly large and diverse workforce, some staff might start to pursue their own
objectives rather than promoting the firm’s efficiency and profitability. The issue of
managerial objectives will be addressed in Chapter 6.
Pecuniary diseconomies and external diseconomies of scale might also emerge. For
example, specific factors of production might become in short supply and, as a result,
instead of benefiting from economies of bulk purchase, the firm now starts to experience
increasing factor prices. The industry might also become so concentrated in a given area
that additional congestion costs are incurred.