How do external economies of scale affect average costs for a firm?

External economies of scale occur when a firm's average costs decrease as the industry grows, benefiting from factors that extend beyond the individual business. These factors may include the development of a skilled workforce, improved supplier networks, or enhanced infrastructure that arises from the concentration of similar firms in a specific region.

As more firms enter an industry in a particular area, shared resources such as specialized suppliers and better transportation networks emerge, which can reduce the cost of inputs and improve overall efficiency. This leads to lower average costs for firms operating in that industry, as they can take advantage of these location-based benefits. Therefore, the correct answer highlights how external economies of scale effectively decrease average costs due to these advantages associated with industry location.