Question

Give a personal example of a good that has a positive network externality. Give a personal example of a good that has a negative network externality. Explain why you chose these two goods.

Answer 1

Externalities of the network are the impact a product or service has on a user when others use the same or compatible products or services. Positive network externalities exist where the benefits (or, more technically, marginal utility) are a function of the number of other users increasing. If the benefits are a decreasing function of the number of other users, negative network externalities occur.

Facebook , for example, is likely to confer positive network externalities, because it is more valuable to a consumer if more users do use it. Conversely, a road can impart negative network externalities because a road driver causes traffic for other road drivers.