Lots of so-called "Web2.0" applications use social services to enhance their product experience. Lets discuss one of them.
Wikipedia describes tags as follows:
"A tag is a keyword or descriptive term associated with an item as means of classification by means of a folksonomy. Tags are usually chosen informally and personally by the author/creator of the item — i.e. not usually as part of some formally defined classification scheme. Tags are typically used in dynamic, flexible, automatically generated internet taxonomies for on-line resources such as computer files, web pages, digital images, and internet bookmarks (both in social bookmarking services, and in the current generation of web browsers - see Flock and Mozilla Firefox 2.0x). For this reason, "Tagging" has become associated with the Web 2.0 movement."
A great example of an application integrating tags is Flickr. This online photo-sharing service allows you to place tags on individual photographs. The intention is to better describe the picture using text, thus making it easier to find.
However, not all is well in tagland. The problem with empowering users, as always, is the knowledge level of the users. A system is as good as its users are clever. People are left guessing which tags to use, which quite often results in them piling the tags on like it's confetti.
A good use of tags is to show whether an image was taken at a certain event. This works very nicely, but unfortunately, most people have difficulties choosing the right tag, as there isn't a central database to choose from. An example from Web2.0 conference @media2005: Pictures from this event turn up tagged with: atmedia2005, @media2005, atmedia, @media, media, 2005. This seems totally unnecessary. Ideally, there would be a database of events. You could then simply associate your picture with the database entry and be done with it.
Another way tagging really works excellently, is tagging the picture with what's in it. If you take a picture of a Nikon D200, tag it so. But unfortunately, there's lots of people that go around tagging each picture with the camera they made the picture with. A bit silly, as this information is recorded separately by Flickr.
As Zach put it. He has a point. I think the tag cloud is probably the worst idea in the history of the internets. "why not put all the tags we have, and shove them in all together!" Tag clouds are often mistaken for visual eye candy. Please avoid them. Seeing hundreds of text links is painful to the eyes, and provides no useful information whatsoever.
The conclusion of my rant is this. Tags are a very nice idea, but only theoretically. The technology is flawed because it places full control in the hands of the users, who more often then not prove themselves quite incapable of using it properly. Moderation of the tags is needed before they can be used effectively in any web application.