Network externalities

(noun)

Are evident when the value of a product or service is dependent on the number of other people using it.

Related Terms

  • Natural monopoly
  • economies of scale

Examples of Network externalities in the following topics:

  • Economies of Scale and Network Externalities

    • Economies of scale and network externalities discourage potential competitors from entering a market.
    • Economies of scale and network externalities are two types of barrier to entry.
    • Network externalities (also called network effects) occur when the value of a good or service increases as a result of many people using it.
    • This is evident in online social networks.
    • Social networks with the largest memberships are more attractive to new users, because new users know that their friends or colleagues are more likely to be on these networks.
  • Defining Monopoly

  • Introducing Externalities

    • An example of an externality is pollution.
    • The third parties who experience external costs from a negative externality do so without consent, while the individuals who receive external benefits do not pay a cost.
    • The existence of externalities can cause ethical and political problems within society.
    • Air pollution caused by motor vehicles is an example of a negative externality.
    • Give examples of externalities that exist in different parts of socity
  • Positive Externalities

    • Positive externalities are benefits caused by activities that affect an otherwise uninvolved party who did not choose to incur that benefit.
    • In the case of positive externalities, a transaction has positive side effects for non-related parties.
    • The homeowner's neighbors benefit from a positive externality.
    • Since parties that create the externality aren't compensated, they do not have any incentive to create more.
    • Use an example to discuss the concept of a positive externality
  • Tax

    • Corrective taxes incentivize economic actors to reduce the production of goods or services generating negative externalities.
    • Taxes are a market-based policy option available to the government to address externalities.
    • The tax is set equal to the value of the negative externality and provides incentives for allocation of resources closer to the social optimum.
    • In the case of negative externalities, the social cost of an activity is greater than the private cost of the activity.
    • The level of the corrective tax is intended to counterbalance the externality.
  • Externalities and Impacts on Resource Allocation

    • In the long run, externalities directly impact resource allocation.
    • A negative externality, also called the external cost, imposes a negative effect on a third party to an economic transaction.
    • Positive externalities, also referred to as external benefits, impose a positive effect on a third party.
    • Air pollution from vehicles is an example of a negative externality.
    • Examine externalities and how they the impact resource allocation of natural resources.
  • Externality Impacts on Efficiency

    • An example of a negative externality is pollution.
    • An example of a positive externality would be an individual who lives by a bee farm.
    • Positive and negative externalities both impact economic efficiency.
    • Positive externalities are beneficial to the third party at no cost to them.
    • It also shows the economic costs that are associated with externalities.
  • Regulation

    • The government can respond to externalities through command-and-control policies or market-based policies.
    • The government can respond to externalities in two ways.
    • Such measures make certain behaviors either required or forbidden with the goal of addressing the externality .
    • On the other hand, if the government allows too much to be dumped in the river, they have failed to mitigate the negative externality.
    • If the government is unsure of how to effectively regulate the market, it should seek other methods of mitigating the externality.
  • The Coase Theorem

    • The Coase theorem states that private parties can find efficient solutions to externalities without government intervention.
    • This is an externality because the Smith family does not pay the Jones family for the utility received from gathering fallen pears.
    • In response, the Jones family can put up a net that will prevent pears from falling on the Smith's side of the property line, eliminating the externality.
    • This graph exemplifies how Coase's Theorem functions in a practical manner, underlining the effects of an externality in an economic model.
    • According to the Coase theorem, two private parties will be able to bargain with each other and find an efficient solution to an externality problem.
  • Externalities in the Health Care Market

    • Health care can impact people beyond the person receiving and the person providing the care, causing positive and negative externalities.
    • A classic example of externalities is the automobile.
    • In health care, the critical externality in most systems is the care provided to others.
    • You benefit from a positive externality of others receiving health care.
    • The basic premise of an externality is captured in this diagram, where external factors affect the internal economic system for a product or service.
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