Re: Network "effects" versus "externalities"

Robin Hanson (
Mon, 15 Mar 1999 14:04:16 -0800

T.0. Morrow wrote:
>A week or so ago, Robin Hanson objected to the label "network effects" on
>grounds that "externalities" fits better, that economists should stick
>standard terminology, and that "effects" is so loose as to mean nothing.
>... Robin's argument left me unconvinced because I think that it courts
>confusion to call call mere *pecuniary* externalities caused by network
>effects by a term normally reserved for *non-pecuniary* externalities. ...
>Joseph Farrell's ... explained to me that economists decided in the 1920s
>that "externalities" ought not apply to mere pecuniary effects. He added
>that, while he thinks that network effects sometimes lead to conventional
>externalities, they often do not. Hence his preference for "network effects."

Farrell is an advisor of mine here, and I respect his opinion, so on that ground I should defer. On the grounds of the argument you've described, however, I retain my previous objection. I think those 20s economists were playing word games that ultimately lead to more confusion than it avoided. It seems to me natural to say that a "pecuniary externality" is in fact an externality. Those who assume that any externality must be non-pecuniary, or that any pecuniary externality is harmless, are assuming too much.

Robin Hanson   
RWJF Health Policy Scholar             FAX: 510-643-8614 
140 Warren Hall, UC Berkeley, CA 94720-7360 510-643-1884 after 8/99: Assist. Prof. Economics, George Mason Univ.