Here are the four types of economic externalities according to Duncan Watts, with explanations and examples by yours truly:
- Information externalities: Knowing how others have acted under similar circumstances saves me the effort of evaluating all the options "objectively." Example: I am hungry. McDonalds has sold 30 billion Big Macs. They must be OK.
- Coercive externalities: Anticipating the impact of my decision on others influences my choice. Example: Everyone is drinking at this party. What will they think of me if I don't drink?
- Market externalities: As a particular option is chosen by more and more people, that option becomes more and more valuable to all those who have chosen it. Example: In 1980 very few people had email and so email was of very limited use. In 2007 many people have email and that popularity makes email exponentially more useful.
- Coordination externalities: I will sacrifice my short-term selfish interests for long-term gains that depend on favors from others, to the extent that (1) I care about the future, and (2) I believe my actions affect the decisions of others. Example: When my friend lends me $10, I will pay him back the next time I see him. I lose $10 when I pay him back but gain more than that in the long run.
- Information externalities --> cardinality and centrality
- Coercive externalities --> connectivity and clustering
- Market externalities --> structural equivalence
- Coordination externalities --> symmetry and asymmetry
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