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: Understanding the Concept:
The question asks to identify the type of economic externality associated with network-based products like smartphones. An externality is a cost or benefit that is imposed on a third party who did not agree to incur that cost or benefit. - Consumption vs. Production: Does the externality arise from using the product or making it? - Positive vs. Negative: Is the effect on the third party beneficial or harmful?

Step 3: Detailed Explanation:
The key here is the phrase "interconnected by a network". This refers to a network effect. \[\begin{array}{rl} \bullet & \text{Consumption Externality: The benefit or cost arises from the consumption (use) of the smartphone by an individual.} \\ \bullet & \text{Positive Externality: When one person buys and uses a smartphone, it increases the value of the network for all other smartphone users. For example, if your friend gets a smartphone, you can now communicate with them more easily (e.g., via messaging apps), which benefits you. This is a positive effect on a third party (other users).} \\ \end{array}\] Therefore, the sale and use of smartphones create a positive consumption externality, also known as a network externality. A negative consumption externality would be something like secondhand smoke. A production externality would relate to the manufacturing process, such as pollution (negative) or technology spillover (positive).

Step 4: Final Answer:
The sale of products like smartphones interconnected by a network is a close example of positive consumption externalities.