I see that Paul Krugman is talking about the consequences of Fake News so I will enter this market and supply some thoughts. I will define fake news as stories that are “juicy” but not true. Think of headlines such as “Elvis is Alive”. This is an old example of fake news. Throughout this post, I will assume that there is an objective reality (so, I will get a C in some philosophy class).
There are four cases to consider.
Case #1: Both the supplier and demander know that the story is false. Think of the National Enquirer stories stating that Elvis is on Mars.
Case #2: The supplier knows the story is false but the demander believes the story is true.
Case #3: The supplier believes the story is true and the demander believes the story is true.
Case #4: The supplier believes the story is true and the demander believes the story is false.
“Fake News” has no social consequences in cases #1 or case #4. Case #3 will feature no strategic element. This is just Tiebout sorting in ideological space. For example, climate change deniers say the world isn't warming and climate deniers go to this website and read this and the echo continues.
I believe that Dr. K is mainly concerned with Case #2. What % of all suspect stories fall into this category? Dr. K has a cynical model in mind in which sophisticated agents (think of Trump and Putin) manipulate the gullible public with messages and then the Facebook and Internet accelerate this information throughout the system as it infects billions and influences real events.
Case #2 raises some deep issues, I will state them as questions;
1. What is it about the demanders that they don't recognize the “fake news” when they read it? Are they dumb? Are they eager to see stories that confirm their prior worldview? What is the source of this heterogeneity parameter related to their “susceptibility” to be infected?
2. In public health, we quarantine those who may spread contagion. Is Dr. K. calling for a messaging quarantine of the “susceptible people” or is he proposing ending free speech for those who spread the contagion?
3. If there is objective reality, do those who are susceptible to “fake news” bother to track how this reality is evolving in order to update their beliefs? Or in the cases of events such as elections, the election occurs so soon (November 6th) that there is no way for objective reality to offer some clues before a key decision (who to vote for) must be made?
4. In a world featuring heterogeneous news consumers, and profit maximizing news sellers what are pareto improving government interventions? What pareto weights would Dr. K use in answering this question? When I taught at the Fletcher School, one student suggested that there should be a constitutional amendment requiring people to watch the PBS News Hour each night.
5. Why has “fake news” become an issue now? What is it about 2016? Has Facebook made communication “too cheap”? Can prices be too low? In a “contagion” economy, the answer is yes. We may want some firewalls around some activity. For example, in international finance — a Tobin Tax will reduce the likelihood of runs on LDCs banks because it is more costly to pull money from a LDC.