Question

Which of the following best describes network? externalities?
A.They are the benefits to a firm from increasing its online presence.
B.They are the benefits received by other firms from the actions taken by a monopolist.
C.They occur when a? product's value increases as more consumers begin to use it.
D.They occur when a firm hires an outside company to help lower its costs

Answer 1

Network Externalities :

Network externality or network effect is the positive effect in which an additional user of a good or service has on the value of that product to others. When a network effect is present, the value of a product or service increases according to the number of others using it.

or

The network effect is a concept where increased numbers of people or participants improves the value of a good or service.

The example is the telephone, where a greater number of users increases the value to each. A positive externality is created when a telephone is purchased without its owner intending to create value for other users, but does so regardless.

The internet is also a very good example. In the starting, there were very limited users of the internet and for that time it was not that much helpful to the users. As more and more users gained access to the internet, it was becoming more helpful to the users as more information, services was getting added, also more websities were also created. In a nutshell internet became extremely valuable as more people were using internet.

Hence option C best describes the concept network externalities.