Thursday, October 4, 2012

Google, the benevolent behemoth

On of the major problems with a project like the Internet is that everything about it seems to have positive externalities: that is to say that almost every good innovation on the Internet (think blogs, broadband connectivity, good search engines, Wikipedia) is good for every other sector of the Internet. What this means is that these things get under invested in, since the company doing the investment doesn't get all of the payout (since a lot of the benefit is to other sectors entirely). One way to address this sort of market failure is to use the power of government (good schools are good for all americans, not just students, so the government funds them), but that doesn't always work out beautifully (see: every single DMV office in existence, California and Texas's school systems).
This is why google's behemoth size is such a good thing. When they make the Internet better, they make more money because they make money from most ads on the web. Economists call this internalizing an externality, and its why gmail, blogger and the installation of fiber optic high speed internet in Kansas City make sense for them. Even if they don't each make sense alone, they get more people looking at more ads on the web everywhere, which means more money for google.
This is the upside to having less competition and market domination by a small number of players, and it is the conceptual converse of the tragedy of the commons.

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