What Are Network Externalities?

Los Angeles freeway

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Network externalities are the effects a product or service has on a user while others are using the same or compatible products or services. Positive network externalities exist if the benefits (or, more technically, marginal utility) are an increasing function of the number of other users. Negative network externalities exist if the benefits are a decreasing function of the number of other users.

For example, Facebook likely confers positive network externalities since it is more useful to a user if more people are using it as well. Conversely, a road can confer negative network externalities since a driver on the road creates traffic for other drivers of the road.