Economics of Information Systems

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Table of Contents

Intangible benefits
Explicit costs
Risks and uncertainties
Cost/benefit Analysis
References

Intangible benefits

The only tangible benefit that the learning institution will experience is the annual estimated revenue from outsider students registering to learn French in the institution. Whenever outsider students benefit from the online system to study French, then the system has a positive externality to the society. However, most of the benefits associated with the online system are intangible surplus advantages on top of the tangible benefits.

Valuation of time: Time is a very important aspect of life. Incorporating the French language lessons into the syllabus will save students of the time they would need to learn the language after school (Kingma, 2001, p. 128).
Valuation of richness of information: Installing an online system to learn French will mean that students will interact more with the systems. They will go an extra mile and obtain richer information as compared to students who do not have the opportunity to interact with the online systems. Moreover, since the French tutors will comprise of the customary instructors, students will interact with the instructors freely, and this will bring a better understanding of things, a benefit that will enable students to obtain rich and quality information.
Valuation of the training: Putting up an information system within the learning institution will mean all trainings will take place within the organization. The organization will no longer have to spend on sponsoring students and instructors to train on French courses elsewhere.
Valuation of trust: Trust is of paramount importance in any organization as it enables the organization to maintain and obtain new customers (students in this case). The ministry of Education will regard the institution as ideal and trustworthy (Varian, Farrell, & Shapiro, 2004, p. 49). The benefit enables the organization to have a competitive advantage over the other learning institutions.
Valuation of life: Whenever students join learning institutions, they expect to come out better people than the rest of the individuals who never went for further education; the learning institutions save the lives of the students. The students expect to be highly demanded and worthwhile people, and that is the value of life obtained from higher learning institutions.
Total revenue: The total revenue that the organization is likely to obtain by putting up the online system is given by summing up the intangible and tangible benefits. Total revenues are the opportunity benefits.

Explicit costs

Lemons market

Lemon markets occur when people consider buying second-hand machinery. Second hand machinery could be good or bad (referred to as lemons). The only person who knows whether the machinery is good or whether it is a lemon is the owner (Experiment, 2002, p. 1). However, since the owner wants to sell the machine, he will hide the true information from the buyer, and the buyer risks when buying used machinery. The buyer would be lucky enough to buy a good machinery, or unlucky to buy a lemon.

Adverse Selection

In the case of a lemon market, one side of the traders know the true information about the machinery (usually the seller), while the buyer does not know if the machinery is a lemon or a good one. This leads to asymmetric information, which leads to the adverse selection market problem (Experiment, 2002, p. 5). In adverse selection, the traders opt to deal with randomly selected traders rather than volunteer traders.

Moral hazard

This incidence occurs when two trading partners have conflicting interests. One party of the traders takes an action that does not favor the other party as compared to the action that a third party could have taken (Experiment, 2002, p. 6). If the online system is insured against fire, the institution will be less interested to prevent fires (a moral hazard), as compared to another institution whose property is not insured against fire.

Auxiliary Markets for vulnerabilities

Computers systems are bound to errors called vulnerabilities. The vulnerability information is extremely important because it determines the level of security for a computer network (Bohme, 2005, p. 1). Software developers and brokers have invented and created auxiliary markets for vulnerabilities, where, computer owners have to pay heavily to have their computers fixed.

Vulnerabilities as negative externalities

Some criminal organizations earn a lot of money by selling zero-day exploits (newest computer vulnerabilities). The innocent computer owners suffer from the actions of other individuals, and they have to pay heavily to have their computers fixed. From this perspective, vulnerabilities are negative externalities to the uninformed computer owners (Bohme, 2005, p. 1).

Risks and uncertainties

Uncertainty results from the existence of various possibilities. Computers and all machineries of the online system to study French need insurance from any uncertain future happenings. Uncertainties of the online system range from virus attacks of the computers to hackers of the system. It is noteworthy that some programming information of the online system to study French is highly confidential. Any hacking of the information is highly risky as hackers can corrupt the functioning of the systems as well as cause fraud losses. Uncertainties can also result from disasters like fire outbreaks, floods or theft could lead to potential losses (Hubbard, 2010, p. 53).

Risk is the state of being uncertain of the occurrence of some phenomenon. In putting up an online system to study French, the computers have 0.5 probability of being infection of computer viruses if they do not have a strong antivirus. An event of fire or theft will be a negative externality to the society. This is because in case of fire, the property of the neighboring community will be at the risk of catching fire, and in the case of theft, the community will suffer from the noises of the sirens (Hubbard, 2010, p. 107). In measuring risks and uncertainties, it is necessary to estimate the frequency of occurrence of a certain risk, the productivity decrease during the event, and the labor cost to fix the event.

Cost/benefit Analysis

The Total Cost (TC) is a summation of the Fixed Costs (FC) and Variable Costs (VC). Assuming the FC were $300,000+ $206,400 (VC) =$526,400 (TC).

The total revenues per annum amount to $607,500.

The cost benefit ratio, calculated as ($607,500/$526,400) =1.15406. For a public utility such as the online system for learning French, The cost benefit ratio for every stakeholder is unquantifiable. However, the cost benefit ratio for the entire organization it is 1.15406 (ratio greater than one), as shown in the calculations above. Therefore, the project is worth investing. To support in financing the sprouting project, the institution will have to allocate at least 5% of its budget to the online system. This amount will add on the revenue obtained from the outsider users charges to help in servicing all the explicit costs. Considerations should be made to ensure that all new initiatives are equally advantageous.

References

Bohme, R. (2005). Vulnerability markets: What is the economic value of a zero day exploit? Web.

Experiment 2: Adverse selection. (2002). Web.

Hubbard, W. (2010). How to measure anything finding the value of intangibles in business (2nd ed.). Hoboken, NJ: Wiley.

Kingma, R. (2001). The economics of information: A guide to economic and cost-benefit analysis for information professionals (2nd ed.), Englewood, CO: Libraries Unlimited.

Varian, R., Farrell, J., & Shapiro, C. (2004).The economics of information technology: An Introduction. Cambridge: Cambridge University Press.

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