Diseconomies of scale occur when, as a business expands in the long run, the unit cost of production increases
Diseconomies are the result of decreasing returns to scale and lead to a rise in average cost
Diseconomies of scale in a large business may be due to:
Big organizations often suffer from the debilitating effects of internal politics, information over-load, complex bureaucracy, unrealistic expectations among managers and cultural clashes between senior people with inflated egos. The result can be that hidden costs increase quickly – expense accounts, a slump in productivity, a deadweight loss of time in slow-moving big businesses. This is the essence of internal diseconomies of scale.
Avoiding diseconomies of scale
The best way to avoid diseconomies of scale is to make business organization less complex and more transparent.