American Public University
Economies of scale are a term used in the science of economics. Economies of scale explain the relation between efficiency and volume of business. If the cost of business increases parallel to the increases in the volume of business, then this is called negative economies of scale. If the increases in the volume cause decrease in the cost of business, then this is called positive economies of scale.
An important example in the transportation industry is the public transportation. Economies of scale are an essential term to be taken into consideration in the public transportation. Some municipalities prefer a competitive market type for the public transportation. In a competitive market, different companies might use different infrastructures and transportation vehicles to compete in the market. However, because the transportation infrastructures are costly, it might cause high prices in the public transportation. It is possible to claim that the competition in the market will keep the level of service quality high; however, because of the possible high prices in the market, the competitive market type might not be efficient.
Instead of creating a competitive market, creating a monopoly in the public transportation by legal regulations and increasing the volume of one company in the market can decrease the prices in the public transportation market. Many studies report that people prefer low prices in the public transportation market at a certain service quality. Thus, the monopoly and, as a result of monopolistic market type, economies of scale might develop efficiency for the agents in the public transportation market. However, the economies of scale might cause loss of service quality in the public transportation market. Consequently, positive economies of scale might increase the efficiency for the people; however, it might decrease the service quality. The economies of scale are an essential advantage for the companies, but not for the customers all the time.
References
Farsi, M., Fetz, A., & Filippini, M. (2014). http://www.cepe.ch/download/cepe_wp/CEPE_WP48.pdf. Centre for Energy Policy and Economics. Retrieved 28 December 2014, from http://www.cepe.ch/download/cepe_wp/CEPE_WP48.pdf
Small, K. (1992). Urban transportation economics. Chur [Switzerland]: Harwood Academic Publishers.
