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HAI Policy Briefs

October 2020

Modeling Effective Regulation of Facebook

Social Media platforms break traditional barriers of distance and time between people and present unique challenges in calculating the precise value of the transactions and interactions they enable. In the case of a company like Facebook, each layer of connections creates value and attracts additional users to the platform. The compounding nature of this phenomenon gives platforms significant market power. In the face of growing scrutiny from policymakers, the media, and the public, regulators are now considering a number of proposals to ensure platforms do not abuse their market power or restrict the economic benefits of their networks from being more equitably distributed.

Key Takeaways

Policy Brief October 2020

➜  Our model provides the first quantitative framework to gauge the effect tax policy or regulatory action would have on platform usage, consumer welfare, and Facebook revenues.

➜ The average Facebook user values their use of the platform at about $79 per month, while the company’s own quarterly reports say each user only generates $11.67 per month in ad revenue. Understanding how this relationship reacts to changes in taxation or regulation is the key to understanding what policies will be effective and which will fail.

➜ Taxing advertising would increase Facebook usage and consumer welfare, while taxing the number of users would do the opposite.


Seth G. Benzell - Chapman University
Avinash Collis - University of Texas at Austin

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