External economies are benefits that are created when an activity is conducted by a company or other type of entity, with those benefits enjoyed by others who are not connected with that entity. The entity that is actually managing the activity does not receive the external economies, although the creation of these benefits for outsiders usually has no negative impact on that entity. The nature of the benefits may include providing inspiration for some new idea, or even something as simple as providing a visual image that the viewer finds appealing.
One way to understand how external economies occur is to consider the display window at a local furniture store. The purpose of the window is to present the goods on display in the most appealing manner, hopefully prompting potential customers to stop, see the display, and come into the store and make a purchase. In this way, the store generates direct or internal benefits for its efforts. At the same time, if someone passing by notices the display, is inspired by the furniture arrangement, and goes home to rearrange his or her furniture in a new way, that individual has received an external economy that is never realized by the furniture store.
External economies are the opposite of what is known as external diseconomies. With the former, some sort of benefit is generated to outside parties, without really triggering any benefits for the business engaging in an activity. The latter involves the creation of some sort of loss for an outside party, with that diseconomy not really impacting the originator of that activity.
One aspect of external economies is that benefits of this type will not have any impact on the prices of goods and services in the marketplace. The furniture store that created the window display will not adjust its pricing based on the fact that a passerby received a benefit in the form of inspiration to rearrange his or her furniture. From this perspective, the creation of external economies has no relevance to the market price of goods or the market price of services provided by a given company. This is true even if a number of people notice the display and develop several different ideas of how to rearrange the furniture in their homes. As long as the pricing for the goods is competitive with similar goods offered for sale by other businesses, supply and demand will exert influence on market prices, with no real consideration of external economies that result from the attempt to sell those goods.
