The Externalities of Social Networking

Over the past couple of years the world has witnessed the advent of social networking. Facebook, Myspace, and Twitter have essentially created a network externality whose growth (and benefits) has reached a point were private and social costs are beginning to emerge The added benefits of a social networking interface are endless. Firms are able to their business models, maximize per dollar marketing expenditures, and have access the the most competitive labor market the world has seen. Users on the other hand wirelessly are able to obtain news from any part of the world in the blink of an eye. Both parties are essentially able to interact in this highly complex global economy with the smallest of efforts.

But we all know what economists have to say about this, there is no free lunch. The costs of this are bourn on some while the benefits are distributed to all. Social networking sites have essentially created a free rider problem, a negative externality that occurs when people receive the benefit without bearing any of the cost. The classic example of this is the firm that pollutes the river that kills the fish and thus hurts the fishermen. In this case the burden falls on news companies who pay writers and reports to receive and send news which are in turn paid for by consumers. What social networking has done is allowed information to be passed on to consumers who do not pay for it. News networks such as the Wall Street Journal, The Economist, and The New York Times have curbed this problem (only slightly) by charging users to see their content. Companies are aware that this is not the optimal solution and need a way to raise their revenues.

We have seen that the advent of the internet itself has destroyed the newspaper industry and companies are just beginning to adjust (albeit with downsizing being a major factor). Firms understand that charging fees and advertising revenue cannot combat their operating costs so they need a helping hand from the social networking industry. To eliminate this problem its in the best interests of news companies that the Pigovian approach be taken. By taxing behavior you establish the people who value the content (news) and weed out most of the free rides who would not have paid for it. So it is in my opinion that the future of social networking will come at a price, mainly in the form service charges in the form of monthly fees, two-part tariffs, or per use fees. The types of pricing models are endless and I certainly have no idea which will be pursued.