Network externalities

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.