Week 7 Exercises: Externalities

Externalities

	Negative Externalities	Positive Externalities
Cause	Harms to others not considered in decisions	Benefits to others not considered in decisions
Problem	Too much of harmful thing produced	Locked-into a monopoly
Example (general)	Pollution	Social media
Example (security)	Botnets (device owners)	Apple Zero-Days
Other Names	Tragedy of the Commons	Network Effects

Policy Solutions

	Ex Ante	Ex Post
When they are enforced	Before attacks occur	After attacks occur
Incentive	Regulation (rules)	Liability
How they work	Always follow required processes	Only matters when there is an attack
Benefits	Easier to tell if followed	Difficult to tell if not working
When costs happen	Regular budget (low risk)	Only when attacked (high risk)
Challenge	What rules will stop attacks?	Will liability be enough to motivate security?
Doesn’t work when	Lack info about harms, protections	Firms can’t be held liable, or can’t pay enough