External economies of scale are cost savings that happen when an entire industry grows. These benefits are shared by all companies within that industry.

Common types include:

• Infrastructure: Government improvements in roads, transport, or internet networks.
• Skilled workers: An industry that grows in one area attracts a large pool of trained professionals.
• Supporting industries: Specialized suppliers move nearby to serve the growing industry.
• Knowledge sharing: New ideas and innovations spread easily between neighboring companies.
• Cluster effects: Many similar businesses grouping together in one location to share resources.

Key features:

• They benefit every firm in the industry, not just one.
• They are caused by external factors outside of a single company’s control.
• They lower production costs for the entire industry.

Real-world examples:

• The tech companies in Silicon Valley.
• The banking firms in London.
• The movie studios in Hollywood.

Economic effect: These factors shift the long-run average cost (LRAC) curve downward for all firms in the industry.