**
3. Network Externalities**

Networks exhibit positive consumption and production externalities. A positive consumption
externality (or network externality) signifies the fact that the value of a unit of the good increases
with the number of units sold. To economists, this fact seems quite counterintuitive, since they
all know that, except for potatoes in Irish famines, market demand slopes downwards. Thus,
the earlier statement, "the value of a unit of a good increases with the number of units sold,"
should be interpreted as "the value of a unit of the good increases with the
*expected* number of units to be sold." Thus, the demand slopes
downward but shifts upward with increases in the number of units expected to be
sold.