According to diseconomies of scale; a firm or an industry cannot avail of economies for an indefinite period of time. With the expansion and growth of an industry, certain disadvantage also begin to arise.
The extensive use of machinery, division of labor, increased specialization and larger plant size etc., no doubt entail lower cost per unit of output but the fall in cost per unit is up to a certain limit. As the firm goes beyond the optimum size, the efficiency of the firm begins to decline. The average cost of production begins to rise. This concept is known as diseconomies of scale.
The main factors causing diseconomies of scale and eventually leading to higher per units cost are as follows:
(i) Lack of coordination. As a firm becomes large scale producer, it faces difficulty in coordinating the various departments of production. The lack of coordination in the production, planning, marketing personnel, account, etc., cause diseconomies.
(ii) Loose control. As the size of plant increases, the management looses control over the productive activities. The misuse of delegation of authority, lead to higher average cost of production.
(iii) Lack of proper communication. The lack of proper communication between top management and the supervisory staff and little feed back from subordinate staff causes diseconomies of scale and results in the average cost to go up.
(iv) Lack of identification. In a large organizational structure, there is no close liaison between the top management and the thousands of workers employed in the firm. The lack of identification of interest with the firm results in the per unit cost to go up.
(v) External diseconomies. (a) Diseconomies of pollution, (b) excessive pressure on transport facilities, (c) rise in the prices of the factors of production, (d) scarcity of funds, (e) marketing problems of the products, (f) increase in risks.