Evaluate the View That the Separation of Ownership from Control in Large Firms Inevitably Causes Diseconomies of Scale

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Evaluate the view that the separation of ownership from control in large firms inevitably causes diseconomies of scale

In this essay I plan to show what consequences there are from a separation of ownership from control and what effects could occur as a result. I will be arguing whether managers are worth the cost of hiring, to the business as a whole, giving examples of problems that may arise in these types of situations and what impact they can cause. The separation of ownership in large firms is when the owners appoint paid managers to run their businesses, causing ownership to be divorced from control. Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs.

The normal objective of firms is to maximise profits. However, there are cases of satisficing and some firms have other objectives, such as the ethical objectives of charity shops and the government’s aim to preserve jobs. Separating ownership from control, to let specific managers run the firm could have an excellent positive effect, but managers have flaws too. It is vital to understand the important effects, and why economies and diseconomies of scale work, especially in larger firms. Diseconomies of scale are undoubtedly a bad thing for a large firm as the firms will be gaining less revenue and in turn profit.

The separation of ownership from control occurs in large firms (PLCs). The companies sell shares or part ownership to finance their growth. The owner is divorced from control. Satisficing is when managers pursue their own interest, such as managing a bigger business to achieve higher pay or more leisure time rather than trying to maximise profit, after they have achieved an acceptable profit. The manager may merge or takeover other firms to manage a bigger business because larger firms generally provide higher wages. This inevitably causes diseconomies of scale because organising, motivating and communicating with workers...
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