Question

"Sale of products like smartphones interconnected by a network" is a close example of \(\underline{\hspace{4cm}}\).

• A. positive production externalities
• B. negative consumption externalities
• C. positive consumption externalities
• D. negative production externalities

Hint:

For network goods (social media, telephones, smartphones), the externality is almost always a positive consumption externality. The rule is: the more people use it, the more valuable it becomes for everyone.

Answer 1

The Correct Option is C

Step 1: Concept Identification:
The query requires identifying the economic externality type for network-dependent products like smartphones. An externality is an effect (cost or benefit) imposed on a non-consenting third party.- Consumption vs. Production: Is the externality a result of product usage or creation?- Positive vs. Negative: Is the third-party impact beneficial or detrimental?

Step 3: Detailed Explanation:
The phrase "interconnected by a network" is crucial, indicating a network effect.\[\begin{array}{rl} \bullet & \text{Consumption Externality: The benefit or cost stems from an individual's consumption (use) of the smartphone.} \\ \bullet & \text{Positive Externality: When an individual acquires and uses a smartphone, the network's value increases for all existing users. For instance, a friend obtaining a smartphone enables easier communication (e.g., via messaging apps), benefiting you. This constitutes a positive impact on third parties (other users).} \\ \end{array}\]Consequently, the sale and utilization of smartphones generate a positive consumption externality, also referred to as a network externality. An example of a negative consumption externality is secondhand smoke. A production externality pertains to the manufacturing process, such as pollution (negative) or technological advancements (positive).

Step 4: Final Conclusion:
The sale of network-connected products, such as smartphones, exemplifies positive consumption externalities.