Question

Explain the difference between a positive and a negative network externality.

A network externality for a good is positive if

A. the price is lower the more people own​ it, but a network externality is negative if the price is higher the more people own it.

B. the quantity demanded is higher the more people own​ it, but a network externality is negative if the quantity demanded is higher the fewer people own it.

C. the substitution effect of a price change is larger than the income​ effect, but a network externality is negative if the income effect is larger than the substitution effect.

D. consumption by others decreases a typical​ consumer's marginal utility from consuming the​ good, but a network externality is negative if consumption by others increases a typical​ consumer's marginal utility from the good.

E. it has a​ complement, but a network effect is negative if it has a substitute.

Give an example of each.

An example of a positive network externality is the demand for

A. a specially-designed sports car for​ exclusivity, and an example of a negative network externality is the demand for a work of art for status.

B. entry to an amusement park with​ congestion, and an example of a negative network externality is the demand for clothing because almost everyone else has it.

C. a toy to indulge a fad, and an example of a negative network externality is the demand for computers whose intrinsic value increases with other users.

D. clothing to be in style, and an example of a negative network externality is the demand for made-to-order clothing for prestige.

E. a work of art for​ status, and an example of a negative network externality is the demand for a lift ticket with lines.

Answer 1

1. B. the quantity demanded is higher the more people own​ it, but a network externality is negative if the quantity demanded is higher the fewer people own it.
(Network externality is positive is demand is higher when more people owns it and negative if demand is higher when fewer people owns it.)

2. A. a specially-designed sports car for​ exclusivity, and an example of a negative network externality is the demand for a work of art for status.
(Positive network externality means demand for sports cars whose demand increases when more people owns it and negative network externality exists in demand for art.)