Economic externalities and network science

Thanks to Six Degrees: The Science of a Connected Age, which I use as the textbook for my course on web science, I have learned about economic externalities. I don't always include the topic of economic externalities in the class, but last fall I did--with intriguing results. It was all part of the major course redesign that preoccupied me more or less 24/7 from Columbus Day until Kwanza.

Here are the four types of economic externalities according to Duncan Watts, with explanations and examples by yours truly:

1. 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.
2. 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?
3. 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.
4. 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.

Watts discusses the above concepts almost exclusively in terms of their relationship to "tipping point" network dynamics. He also emphasizes the top of the list at the expense of the bottom. Having swallowed Watts' taxonomy of economic externalities into the same pipeline that is slowly digesting Tim Berners-Lee's framework for web science, I now have (1) a chronic case of indigestion, and (2) the following mapping of economic externalities onto basic concepts of network science:

1. Information externalities --> cardinality and centrality
2. Coercive externalities --> connectivity and clustering
   
3. Market externalities --> structural equivalence
   
4. Coordination externalities --> symmetry and asymmetry
   

As I prepare for spring '08, the above appears to be the backbone of my web science curriculum. If it doesn't make sense, dear reader, please be patient with me and stay tuned!

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