Economies of scale refer to the cost advantages that a business obtains due to expansion, which result in the reduction of per-unit costs as the scale of operation increases.
External economies refer to the benefits that spill over to third parties not directly involved in an economic transaction or activity. These benefits are not compensated by the entities receiving them, offering no direct economic incentive to the producer.
Market failure occurs when the equalization of supply and demand fails to produce an efficient allocation of resources from a social viewpoint. Causes for market failure include external economies, incomplete or poorly enforced property rights, and monopolistic characteristics of suppliers.
