In the long run, a number of factors may cause an addition to average cost of firm. They also happen to be both internal and external.
These sources of diseconomies or directly or indirectly linked to the inability of the problems of management which not only crop up when a firm is started, but keep increasing with its size. Chamberlin terms them ‘complexities of management’. Let us note from briefly.
1. Limits of Entrepreneurship:
A firm, by definition, can have only one unit of entrepreneurship though it an have a large number of units of every other input. Moreover, entrepreneurship, in the ultimate analysis, manifests itself in the form of decision-making human beings who have to bear the consequences of the decisions. Therefore, the willingness to take risk varies between individual entrepreneurs and between different situations. Very frequently, wrong or sub-optimal decisions are taken which results in avoidable costs.
Similarly, with an increase in the size of the firm and its activities and departments, the entrepreneurship has to institute a system of delegating responsibility of assessing the ever-changing situation and taking on the snot decisions. It has also to set up an effective monitoring system. All this adds to the operating costs of the firm. In addition, it is found that on account of increase in the size of the firm, a number of additional departments may become necessary (such as a department which maintains leave accounts of the staff). As the administrative set up expands, delays set in and a number of avoidable expenses have to be undertaken.
2. Managerial Autonomy:
With increasing size of the firm, various managerial with (such as technical, financial, sales, marketing and others) have to be given in sufficient autonomy of decision-making. The managers heading these departments, however, do not have a direct personal stake in the success of the firm. In addition, problems of coordination between various departments of the firm have to be tackled. The net result is often diseconomies of scale.
It is argued that the traditional theory is wrong in assuming that a firm always uses its resources in the best possible manner. This is because, in practice, most of the ground level decisions are taken by individual managers and other employees of the firm. And their motivation is advancement of their own careers rather than optimizing the performance of the firm. Quite frequently, they also lack adequate incentive to do their best. Unless there is a very sound system of ‘reward and punishment for each employee, their performance is likely to lack necessary motivation.
As in the case of external economies, external dis-economies are thrust upon a firm by extraneous forces. They are not directly related to the growth in the size of the firm under consideration,
1. There are several reasons for the prices of inputs to move up or their quality to deteriorate. For example, the authorities may impose a tax on one or more inputs. Or there may be a wage revision in the industry or imposed by the authorities on the economy as a whole.
2 Similarly, it is also possible that prices of some imported inputs may go up because of one or more reasons including for example, customs duties imposed by the domestic government or by the exporting country or increase in cost of production abroad, etc.
3. It is possible that on account of war, strikes, some natural calamity, or quantitative restrictions imposed by domestic country or a foreign country, the availability of an essential input may become costlier or insufficient.