Economics Externalities Questions
A network externality refers to the impact that the use or adoption of a product or service has on the value or utility of that product for other users. It occurs when the value of a product increases as more people use it, leading to positive externalities. Examples include social media platforms, where the more users there are, the more valuable the platform becomes.
On the other hand, a production externality refers to the impact that the production of a good or service has on third parties who are not directly involved in the production or consumption process. It occurs when the production process generates costs or benefits that are not reflected in the market price. For instance, pollution caused by a factory's production process affects the health and well-being of nearby residents, resulting in negative externalities.
In summary, the main difference between network externality and production externality lies in their focus. Network externality relates to the impact on the value of a product due to its usage by others, while production externality refers to the impact of production activities on third parties.