Towards a more appropriate method for determining the optimal scale of production units

In this paper the overall diseconomies experienced beyond certain production unit scale thresholds are investigated. These are due to several costs, including those relating to the consumption of non- renewable resources, which firms have generally not internalised, to the extent that they can operate far beyond the socially optimal scale. Economic instruments such as environmental taxes may induce a shift towards marginally more sustainable production levels for a plant of a given size, but they are not designed to affect the plant size itself. This paper suggests a method for determining a socially optimal scale, by focussing on the factors which determine optimality. The results of applying this method show that establishing the scale of production units at a social optimum rather than a private one implies a significant decrease in scale for most economic activities. Downscaling has significant economic welfare and environmental advantages. Incentives linked to the factors which determine the social optimum are put forward as measures for inducing a shift towards an optimal size for production units.