Editing Externality (section)

=== Pecuniary ===
[[Pecuniary externalities]] are those which affect a third party's profit but not their ability to produce or consume. These externalities "occur when new purchases alter the relevant context within which an existing positional good is evaluated."<ref name="FrankPositional">[[Robert H. Frank]], "[http://www.brookings.edu/gs/events/externalities.pdf Are Positional Externalities Different from Other Externalities] {{webarchive|url=https://web.archive.org/web/20121221184110/http://www.brookings.edu/gs/events/externalities.pdf |date=2012-12-21 }}? " (draft for presentation for ''Why Inequality Matters: Lessons for Policy from the Economics of Happiness'', [[Brookings Institution]], [[Washington, D.C.]], June 4–5, 2003).</ref> [[Robert H. Frank]] gives the following example:
:if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall.  But this outcome may be inefficient since when all spend more, each candidate's probability of success remains unchanged.  All may agree that some form of collective restraint on expenditure would be useful."<ref name="FrankPositional"/>

Frank notes that treating positional externalities like other externalities might lead to "intrusive economic and social regulation."<ref name="FrankPositional"/> He argues, however, that less intrusive and more efficient means of "limiting the costs of [[expenditure cascades]]"—i.e., the hypothesized increase in spending of middle-income families beyond their means "because of indirect effects associated with increased spending by top earners"—exist; one such method is the [[personal income tax]].<ref name="FrankPositional"/>

The effect that rising demand has on prices in marketplaces with intense competition is a typical illustration of pecuniary externalities. Prices rise in response to shifts in consumer preferences or income levels, which raise demand for a product and benefit suppliers by increasing sales and profits. But other customers who now have to pay more for identical goods might also suffer from this price hike. As a result, consumers who were not involved in the initial transaction suffer a monetary externality in the form of diminished buying power, while producers profit from increased prices. Furthermore, markets with economies of scale or network effects may experience pecuniary externalities. For example, when it comes to network products, like social media platforms or communication networks, the more people use the technology or engage in it, the more valuable the product becomes. Consequently, early adopters could gain financially from positive pecuniary externalities such as enhanced network effects or greater resale prices of related products or services. As a conclusion, pecuniary&nbsp;externalities draw attention to the intricate relationships that exist between market players and the effects that market transactions have on distribution. Comprehending pecuniary externalities is essential for assessing market results and formulating policies that advance economic efficiency and equality, even if they might not have the same direct impact on welfare or resource allocation as traditional externalities.<ref name="Microeconomics"/>