What do external economies of scale arise from?

External economies of scale occur when the growth of an industry, rather than a specific firm, leads to cost savings and efficiencies. These benefits do not stem from the individual firm's operations but rather from factors related to the industry or the environment in which firms operate.

For example, as a cluster of firms in the same industry develops in a particular region, they may benefit from improved infrastructure, access to a skilled labor pool, shared suppliers, and technological advancements that arise from their collective presence. This can lower the average costs for all firms involved, regardless of their individual management practices or competitive strategies.

The other options do not capture the essence of external economies of scale. Internal management practices are specific to an individual firm and thus do not encompass the broader industry influences that define external economies. Government policies can have an impact, but they are not the direct drivers of economies of scale; they might only create the conditions under which such economies can develop. Competition among local businesses typically leads to higher efficiency at the individual firm level, but does not inherently create the shared benefits characteristic of external economies of scale.