The Economic Case for Regulating Social Media

In Economy, Facebook On
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Social media platforms like Facebook, YouTube and Twitter generate revenue by using detailed behavioral information to direct ads to individual users.

That sounds straightforward enough. But this bland description of their business model fails to convey even a hint of its profound threat to the nation’s political and social stability.

Rising concern about social media abuses has already prompted legislators in Congress to propose the breakup of some tech firms, along with other traditional antitrust measures. But the main hazard posed by these platforms is not aggressive pricing, abusive service or other ills often associated with monopoly. Instead, it is their contribution to the spread of misinformation, hate speech and conspiracy theories.

Because the economic incentives of companies in digital markets differ so sharply from those of other businesses, traditional antitrust measures won’t curb those abuses.

Consider what basic economic theory tells us.

In the market for widgets beloved by economists (substitute your own imaginary item, if you like), producers expand output until the additional cost of the last widget produced is equal to what the last buyer is willing to pay for it. Stopping short of that level would leave cash on the table, since an additional widget could be sold at a price greater than its marginal cost. Exceeding that level would also be wasteful, since the last buyer would then value the purchase at less than its marginal cost.

The upshot is the economist’s celebrated efficiency criterion: Goods and services should be sold for the marginal cost of producing them.

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