Should taxes pay for newsreporting?

Written by Oliver Frost - Winchester College

In an age where social media is creating echo chambers and increasing polarisation in countries, accurate news reporting is essential to educating and informing people about what is happening in the world. Accurate news reporting can be defined as findings from true and proven information about an event that are not subject to any biases. But even with these problems, should it fall upon the government to provide this accurate news? Or should the government let the market supply these goods?

Figure 1 - Pexels

Currently, the UK government has created and is fully funding its own national news service, the ‘British Broadcasting Corporation’ (BBC). With an average public rating of 6.4 out of 10 (i) . It might seem that this positive rating has justified the government providing this news service. Comparatively, private companies are supplying accurate news with subscription memberships, and they have seen consistent growth in their revenue. So, is accurate news reporting actually a public good?

I argue that accurate news reporting is only partially a public good due to the problem of information being rivalrous in a financial market. Following on from that, I will argue that the government should only partially fund news agencies with money from taxation. Since the positive externality of accurate news reporting is minimal compared to the cost of running a nationalised news service.

To start, a public good can be defined as a good that is non-excludable, where non-excludable means that no group can be excluded from the consumption of the good, and non-rivalrous, where there is no drop in utility from subsequent rounds of consumption. Accurate reporting of news is generally nonexcludable, with minimal regulations to stop the flow of information. Some firms offer news for free (e.g. Metro) and other firms charge subscription fees (e.g. economist, financial times) for more financial-based news. Conversely, the information on the subscription website can be spread by word of mouth through non-subscription payers. Therefore, we assume that everyone has that information.

Accurate news reporting is inherently non-rivalrous, as consumers gain utility from learning new information conveyed by the news report. If we define utility gain in this way, the consumption of the news by someone else will not decrease the utility gained for the other person. Thus, news reporting is nonrivalrous.

However, the information that people gain from the news, if acted upon, can be rivalrous. Financial news, will alter certain elements of the financial markets, such as the stock price of a company, due to an increase in perceived profitability. The future stock price is determined by public sentiment about the current state of a firm. For example, if more people want to purchase a stock, the demand for the stock will increase, thus raising the price of the stock. When quarterly revenue reports are reported, information is created for investors to base their decisions on. For example, if a revenue report exceeds investors’ expectations and shows that the firm is making larger amounts of profit than expected, then the perceived profitability of the company will increase, and therefore the stock price will increase.

Moreover, a news headline such as a very positive report will influence the behaviour of casual investors. For casual investors who have not spent the time or effort analysing the specific firm, a report of profits might cause them to invest, due to them falling prey to the representative heuristic. The heuristic states that an individual will tend to represent a group, or trend based on a small amount of past evidence.(ii) In the case of investors in financial markets, investors will perceive the past quarter of large profits to be the whole nature of the firm and perceive that the company will grow to the same extent in the next quarter.

Moreover, consumers will fall prey to the ‘hot hand fallacy’ coined by Amos Tversky and co(iii) . This fallacy states that after a string of successes, an entity is more likely to continue to be successful. (iv) This fallacy has been developed in the financial markets, where stocks that show success through large profit reports are perceived to be more likely to overperform in the future. (v) These stocks are known as ‘hot stocks’, and studies have shown that ‘hot’ stocks have evidence of past successes and will be more likely to be purchased. (vi) Therefore, after a positive earnings report, investors will invest more money in firms, causing shifts in its stock prices. Proven by a study in the Journal of Consumer Research by Joseph Johnson and co. they proved that consumers were more likely to purchase a ‘winning stock’, which is a stock that has a history of returning high returns. Therefore, this study demonstrates evidence that people are more likely to invest in a stock that has past successes. (vii) Moreover, large Morningstar rating is indicative of past successes and as shown by a paper by David Whitlark, firms with 5 and 4 stars firms pulled over $230 billion from the 2,3 star firms. (viii) Therefore, signalling that past performance is a massive measure of current investment levels.

Figure 2 - iStock

For example, in 2012 quarter 3 news agencies reported Apple earnings, in which they reported higher earnings than investor predictions. Subsequently, the Apple stock price increased by 5%. (ix) This was due to the fact that investors were more confident that Apple would be able to return higher profits in the next quarter. Therefore, we can say that financial news has a direct impact on the stock price.

To observe why financial news and financial knowledge is rivalrous, let us assume there are two people, person A and person B. Assume that Person A reads the news first, has a chance to use this knowledge and invests in the financial market with a buy order or a sell order. This order will move the stock price up or down. So, this gain in information can be modelled as a n(B) +1. Where n(B) is the volume of people buying the stock, V is the total volume of buyers and sellers combined. As shown above in the essay, when the number of buyers increase, the price of the stock will also increase. Therefore, the subsequent price change can be modelled as:

P(s,f) = P(s,i)*r(B,S)*f

Where P(s,f) is the final price of the stock (s) after a person acts upon the new financial information, and P(s,i) is the initial price of the stock. And r(B,S) is the number of people buying the stock over the number of sellers times a fluctuation constant (f), which is the responsiveness of the stock price to a change in the buy-sell ratio.

From this equation, we can see that when the number of buyers or sellers increases, the price of the underlying stock will move in proportion to the fluctuation constant.

Therefore, when person A decides to buy or sell a stock, the price of the stock will shift accordingly. This will cause the price of the stock for Person B to be more expensive than when Person A bought the stock. Person A, who bought the stock at a lower price, will gain utility from the rise of price in the asset.

When a person reads the news and acts upon the financial information, they will gain a greater amount of utility than the subsequent person who consumes the news. Therefore, proving that financial news is rivalrous. Thus proving that news is not a public good but rather a common good.

For a government to justify providing a good, there must be a market failure in the market for accurate news. One main example of this market failure is the underproduction of the good due to third-party externalities that are not accounted for in the market equilibrium.

In terms of accurate reporting of news, there are two positive externalities for this good. First, there is a positive production externality due to news agencies acting as watchdogs for firms and governments. (x) With this reporting leading to a reduction in abuse from firms upon markets or even harm upon their workforce. Thus creating a fairer market place where people are treated according to their rights. Moreover, these news agencies will hold governments responsible for their actions and propaganda. This will in turn lead to autocratic and totalitarian regimes being dismantled, which is to the benefit of civilians. (xi)

Secondly, by consuming accurate news reports, consumers will have a better understanding of the events unfolding around the world. Therefore, they will be able to make more informed and tactical decisions. Causing labour to be more productive, and thus produce a greater level of output in a given time. Therefore, decreasing the cost of production and subsequently making goods and services cheaper for the general population.

Leaving the market for accurate news to create a price and quantity using the price mechanisms, will not factor in these positive externalities. Therefore, the government has to supply or fund news agencies so that these positive externalities can impact the amount of output of this good.

Figure 3 - iStock

Moreover, news reporting can be used as a fiscal device, altering consumer and investor confidence to encourage growth. Therefore, if we assume that the goals of the government are more socially progressive than those of private firms. Then we can justify giving the power to change consumer and investor sentiment to the government so that the government can use the news to fulfil its macro-economic objectives.

However, using government revenue to fund firms to produce news will always lead to a conflict of interest between the government and the privately owned news firm (xii). This is because speaking out against the entity that funds your research will hinder future funding.

Overall, accurate news reporting is generally called a public good; in some situations however, such as news relating to a financial market, accurate news reporting is a common good. However, the positive externalities of a ‘watchdog’ firm and more informed decisions make accurate news underproduced. Thus, justifying the government subsidising news firms in the reporting of accurate news. With measures in place to stop conflicts of interest between governments and news firms.

Sources:

i ‘Research_to_explore_public_views_about_the_BBC.Pdf’. ii Daniel Kahneman, Thinking, Fast and Slow, 2011. iii Thomas Gilovich, Robert Vallone, and Amos Tversky, ‘The Hot Hand in Basketball: On the Misperception of Random Sequences’, Cognitive Psychology, 17.3 (1985), pp. 295–314, doi:10.1016/0010-0285(85)90010-6. iv ‘Hot Hand: What It Is, How It Works, Evidence’, Investopedia. v Oguz Erşan, ‘Fallacies and Financial Markets’, Passage Global Capital Management, 2021. vi Gerard J. Tellis, Deborah J. MacInnis, and Joseph Johnson, ‘Losers, Winners and Biased Trades’ (2006). vii Tellis, MacInnis, and Johnson. viii David Whitlark, ‘Hot Hand, Regression to Mean, and Unmet Expectations: Marketing the Mutual Fund Mirage’, in AtMA 2019 Proceedings. ix ‘The Influence of Corporate Earnings on Trading’, IG. x The International Encyclopedia of Journalism Studies, ed. by Tim P. Vos and Folker Hanusch, The Wiley Blackwell-ICA International Encyclopedias of Communication (Wiley-Blackwell, 2019). xi Vos and Hanusch. xii ‘Journalism, Public Goods and the Free Rider Problem’, Media Nation, 2023. Bibliography Erşan, Oguz, ‘Fallacies and Financial Markets’, Passage Global Capital Management, 2021 Gilovich, Thomas, Robert Vallone, and Amos Tversky, ‘The Hot Hand in Basketball: On the Misperception of Random Sequences’, Cognitive Psychology, 17.3 (1985), pp. 295–314, doi:10.1016/0010- 0285(85)90010-6 ‘Hot Hand: What It Is, How It Works, Evidence’, Investopedia ‘Journalism, Public Goods and the Free Rider Problem’, Media Nation, 2023  . Kahneman, Daniel, Thinking, Fast and Slow, 2011 ‘Research_to_explore_public_views_about_the_BBC.Pdf’ Tellis, Gerard J., Deborah J. MacInnis, and Joseph Johnson, ‘Losers, Winners and Biased Trades’ (2006) ‘The Influence of Corporate Earnings on Trading’, IG  [accessed 21 June 2024] Vos, Tim P., and Folker Hanusch, eds., The International Encyclopedia of Journalism Studies, The Wiley Blackwell-ICA International Encyclopedias of Communication (Wiley-Blackwell, 2019) Whitlark, David, ‘Hot Hand, Regression to Mean, and Unmet Expectations: Marketing the Mutual Fund Mirage’, in AtMA 2019 Proceedings