Consumer surplus from the internet, revisited

by on July 12, 2011 at 6:58 am in Data Source, Economics, Web/Tech | Permalink

David Henderson raised this question again, as has Bryan Caplan in the past.  Both seem to suggest that the consumer surplus from the internet is quite high or perhaps even “huge,” although I am not sure what number they have in mind.  I am disappointed that they are not engaging with the academic literature on this topic.

1. An 86-page 2010 FCC study concludes that “a representative household would be willing to pay about $59 per month for a less reliable Internet service with fast speed (“Basic”), about $85 for a reliable Internet service with fast speed and the priority feature (“Premium”), and about $98 for a reliable Internet service with fast speed plus all other activities (“Premium Plus”). An improvement to very fast speed adds about $3 per month to these estimates.”

2. A study from Japan found that: “The estimated WTP for availability of e-mail and web browsing delivered over personal computers are 2,709 Yen and 2,914 Yen, on a monthly basis, respectively, while average broadband access service costs approximately 4,000 Yen in Japan.”  By the way, right now the exchange rate is about 80 Yen to a dollar.

3. The Austan Goolsbee paper, based on 2005 data, does a time study to find that the consumer surplus of the internet is about two percent of  income.

4. This paper finds a four percent consumer surplus from the personal computer more generally, not just the internet.

5. Robin Hanson serves up an excellent debunking of some exaggerated consumer surplus claims.

6. Many of the benefits of internet cruising are captured in gdp figures, such as using it to find a job or the money you spend on smart phones.  By the way, here is a good paper on consumer surplus in the book market, though it offers no overall CS estimate from the internet.

You can take issue with these papers for ignoring personal internet use at work, the inframarginal benefits to infovores, or other issues, such as whether the existence of the internet increases workloads in what are supposedly leisure hours.  But there is the place to start and the numbers are not outrageously high, not close to it.

Or put all that aside and think through the problem intuitively, in terms of time use decisions.  Your marginal hour of non-internet leisure time is worth more than spending another hour of time on the internet.  In other words, at the margin your consumer surplus from the internet is about the same as your consumer surplus from going to the movies or taking a walk.  That’s nice, but suddenly the consumer surplus from the internet doesn’t seem like such a big deal any more.  It’s probably not going to add up to millions.  If the internet were as awesome for consumer fun as some people claim, it would have pushed out more of our other uses of leisure time.

What about the inframarginal units of internet use?  Might the consumer surplus there be huge?  If you think of books, movies, newspapers, and CDs as some of the relatively close substitutes for some uses of the internet, we know from cultural economics that the demand curves for those enjoyments are usually smooth, normal, and continuous, more or less.  They don’t have enormous, hidden inframarginal benefits.

Penicillin probably does have such an enormous inframarginal benefit; the initial doses can be of great value but past some margin the value falls to zero or negative.  The internet doesn’t seem to be like penicillin.

You can even make an argument that the inframarginal valuations of internet use are especially low, relative to the marginal values.  Have you ever heard that the internet is “addictive”?  That doing some makes you want to do more?  That the internet has a virtually unending supply of interesting content?  Personally I find that I could read more working papers, without much decline in their interestingness, except that the exigencies of my daily life interfere (at some margin).  Those are all signs that the marginal valuation of the internet does not fall off so drastically as one moves down the demand curve.  If you’re not using the internet more, it’s not because the internet is getting much worse with additional use units, it’s because it is digging into increasingly important parts of your non-internet life.  That brings us back to the inframarginal unit having a value not so far away from the marginal units.

It is likely that the consumer surplus of the internet is in the range of two to four percent of gdp.  On one hand, that’s “a lot” but on the other hand it’s not enough to close the “stagnation gap” in wages since 1973.  It’s not close.  It also may be quite small compared to the consumer surplus from the major innovations from earlier in the 20th century, such as antibiotics, without which I probably would be dead.

Rahul July 12, 2011 at 7:27 am

How trustworthy are these academic measurements though? I am wary when someone takes a broad technology like the internet and then tries to come up with a numerical value for it. Could it be that the problem lies in the very technique of assigning a dollar value to something abstract like the internet? A $-of-GDP measure might work well for old world items but maybe it doesn’t exactly extract the utility people get from something like the internet.

Also, I did not understand the reasoning Tyler uses to show that the consumer surplus from the internet is about the same as your consumer surplus from going to the movies. Yes, at some margin people do choose to watch a movie rather than spend another hour on the internet. But so would they for a lot of other activities (say, going to the zoo or eating pizza, or going for a swim) at some limit. Would this make that entire set of activities equals in consumer surplus?

How does the fact that I choose to do an hour of B after many many hours of cheap A, make A and B equal in consumer surplus?

FYI July 12, 2011 at 10:45 am

i have all the same questions. Actually, the fact that the first number Tyler used is the infamous ‘how much would you pay’ kind of turns me off for the whole thing. How can anyone answer that question in a meaningful way? For all I know, my job in IT would not exist without the internet. How much I value sending emails and how much I value being able to find old stuff I like on eBay?

The internet is so all-encompassing that you cannot price it like that. I understand why he is trying to do so but it just doesn’t work in this case.

blastomere July 12, 2011 at 4:23 pm

“‘how much would you pay’ kind of turns me off for the whole thin”

I agree. If you ask this about water, for example, you’ll get extremely different answers to this question from somebody stranded out in the middle of the Sahara desert with a wallet full of hundreds and somebody back in civilization deciding whether to turn on a tap of free water or not. People will give the answer they think they can bargain for, not their reservation price, much less the price they’d pay if no competitors were available.

Going from books and CDs to the Internet is much like going from the Sahara to free tap water, except that the demand for information,unlike the demand for water (but like the demand for health care) is basically insatiable.

The pizza and movies comparison is equally terrible. Pizza and movies are generally not inputs to work, while content and communications obtained by the Internet increasingly are. We should be looking at the value of the Internet as a capital investment that partially substitutes for and greatly enhances the productivity of education, on-the-job training, research, and communications, not merely its value a a form of entertainment on par with pizza or movies.

Of course you will have a hard time getting an academic to admit that the Internet is a partial substitute for, and in many ways higher quality than, a university education, just as you’ll have a hard time getting a newspaper or scientific journal to admit that it’s in many ways better than what they do.

Ryan July 12, 2011 at 7:31 am

Tyler, be patient. Economist are catching up but, they’re still looking at the Internet in too much of a simple-sense — [to absorb] “books, movies, newspapers, and CDs”. Take your blog for instance, there’s no mention of the ability to deliver products that previously required fuel. I can deliver products to my clients, in a secure fashion, and hold teleconferences, share presentations without travel. My employees do not have to physically move their families because we can all collaborate through an Ethernet port.

I look at the work you’re doing and the papers you’ve presented as the foundation of research. Take it from there.

RZ0 July 12, 2011 at 7:33 am

I think the valid comparison is not between the internet and, say, penicillin, but between the internet and other forms of mass communication and information retrieval, like television, newspapers or the public library.

Hyena July 12, 2011 at 7:33 am

I really like Hanson’s take because it squares the issue nicely while being accessible to people. I do have a question I’d hope you can answer for me: do the studies take piracy and age cohorts into account? I’m curious to know how much piratical activity illicitly increases consumer surplus and how much age adds to it. It also seems like the Internet is more valuable for poor, educated people than for people with large incomes or who lack education. For the latter, I think it probably substitutes for television and so has less extra value.

I know I wouldn’t be able to survive unemployment without it.

TL Jackson July 12, 2011 at 7:50 am

I don’t know about those studies, but I would certainly be willing to pay far more than I do for internet access. Like hundreds of pounds a month.

What this post doesn’t take into account is the time the internet saves for people. Working from home has huge value to me, and wouldn’t be possible without internet connections. Also going shopping used to take time. The internet vs moviess thing doen’t make much sense because most of what I use and value the internet for isn’t leisure, it’s for the neccesities of life which it makes much quicker and easier, thus providing me with more time for leisure. That’s where the value is for me.

(I don’t read this blog regularly but I know this has been going a while, so I don’t know if Cowen has addressed the “making the neccesities of life quicker” point before, apologies if he has, but it is a major ommission from this post)

Tyler Cowen July 12, 2011 at 8:22 am

This value should be contained in WTP figures for on-line access, plus the extra purchases should show up in gdp.

TL Jackson July 12, 2011 at 8:54 am

Yeah, I was basically questionning the WTP figures from those studies, but I guess you were taking them as a starting point for the post, so that was a different conversation. Sorry. I still don’t buy those numbers though, but I’m not really qualified to interrogate the studies.

Andrew' July 12, 2011 at 9:33 am

Didn’t you write a book (or two) on how this value wasn’t captured in GDP, and in fact might show up as a cost?

J Thomas July 12, 2011 at 8:04 am

My 8-year-old daughter got some pokemon action figures as a gift. She eventually found that Target had those, and got some more. Then she did an Internet search and found that there were many hundreds of figures available. She took her allowance and bought the three she wanted most, rather than whatever Target had. They gave her free shipping by 1st class mail, and the package arrived the second day. She was happy.

She had one Pokemon plushy toy that she slept with every night. She wanted another one. She did an internet search and found precisely the one she wanted. Her mother bid on it on Ebay and won, it cost only $8. Plus $12 shipping from Hong Kong. It will probably be here in a couple of weeks.

What was the value of her getting precisely the ones she wanted? I don’t know how to calculate that. It seemed very important to her, but if she’d just gotten whatever was available she probably wouldn’t have thought about it much.

My wife wanted to watch the “Game of Thrones” TV series. But we didn’t have a TV. We could get cable from either Cox or the phone company, both at around $50/month for at least a year, plus extra to get the premium channel that had the show. And I didn’t know the marginal cost of getting TV programs easily available — who knows how much time we’d spend watching them or what they would do to our minds?

We asked my sister if she would let me set their VCR to record the shows so my wife could see them later. But she and her husband both work full time and their son is in a special academic program that leaves him no time for anything but homework plus the work he’s doing on his Eagle Scout status, so they don’t pay for cable either.

Rapidshare let us download each show the day after it came out, for free. I expect she’ll buy the DVD when it comes out. How much value was it that she got to watch it early?

My wife wanted the new Game of Thrones book the day it came out. She looked on the Internet. Amazon had it for half price, and she could actually get it a day early provided she signed up for a shipping fee that was a whole lot like a book-of-the-month club. They said you could cancel any time during the trial period. For slightly less than list price she could get it on the day it came out, or she could get it fairly cheap with free shipping if she was willing to wait. She decided to drive to Borders and buy it on the spot, that way she can get it this morning instead of having it delivered this afternoon.

A few months ago I suggested we try a new Persian restaurant that looked good. My wife would not. But yesterday she saw an online review from some anonymous commenter who said it was good. Now she wants to try it. The Internet persuaded my wife to try something that I couldn’t convince her of. How much is that worth? Something….

Consider all the people who are utterly bored at their office jobs, who get to look at Marginal Revolution and argue about fun stuff. Without the internet their boredom would be far worse. I don’t know how to put a value on that. It doesn’t make them any more productive, but it makes their work more tolerable, and isn’t that worth at least as much as a big raise?

Ted Craig July 12, 2011 at 9:46 am

“Without the internet their boredom would be far worse.”

Or their productivity would be much higher.

FYI July 12, 2011 at 10:50 am

Well yeah, that is actually a good point. New technologies don’t necessarily mean more productivity, and maybe that is why calculating the impact of the internet in the economy is so hard. But still, that is a limitation in our economic models not a problem with the internet. After all, we choose to spend more time doing things that are not productive, no one is being forced to do so. At the end of the day that is why we invent things: to make our life better.

IVV July 12, 2011 at 11:17 am

Nonsense. If I wasn’t surfing, I’d probably be twiddling my thumbs.

Andrew' July 12, 2011 at 11:59 am

Similar story. I can go to K-mart for my son’s action figures and overpay for very few. Or I can go to Ebay and get everything for cheap.

However, this actually costs out of GDP. GDP is doing stuff for other people. Something that allows you to do stuff for yourself is both an increase in utility while at the same time undermining the economy.

J Thomas July 12, 2011 at 12:49 pm

Yes. If we bought the stuff locally, we’d pay various middlemen and part of the cost would stay in the country.

But with the Internet, we can buy directly from Hong Kong so all the money leaves immediately.

Morgan Warstler July 12, 2011 at 2:40 pm

We have no obligation to middle men. And this is why GDP is worthless. WE WANT things to get cheaper, no matter what the macroecon guys say. It undermines nothing to give your money to Hong Kong. They DESERVE the $. Give it to them.

J Thomas July 13, 2011 at 12:06 am

Morgan, what you say makes sense. However, we live in a nation of middlemen. When they join the unemployed, they get upset. They will do things like post stupid ideas on economics blogs, and apply for social services.

They might even stop thinking they’re productive citizens who are responsible for all the good things in the USA because they work hard to keep the economy going and pay their taxes, and start thinking that the world owes them a job. They might decide that smug middlemen are not actually very useful.

When I look at the big picture I’m real undecided what to do. It’s hard to see solutions. But then, it isn’t my job to find solutions for the world economy or even the national economy. When things crash it’s my job to avoid get buried in the debris.

Urso July 12, 2011 at 12:32 pm

For me, at least, my productivity would be higher. But what’s worse, I feel like the Internet downgrades the quality of my time-wasting. I would still waste some time, obviously, without the net, but I’d be reading the local paper and some trade journals. Maybe call my brother or cousin and shoot the shit.

Although revealed preferences show that, apparently, I’d rather spend that time arguing with strangers about economics, it’d be hard to argue that doing so actually improves my life in the long run.

Keep in mind I’m saying this as a relative youngster who’s never had a job which didn’t have more or less unlimited internet access, so I really don’t know what it was like before. Perhaps it’s all just a bunch of misplaced nostalgia.

J Thomas July 12, 2011 at 1:35 pm

“Without the internet their boredom would be far worse.”

Or their productivity would be much higher.

Probably not. Probably most of them can achieve all the productivity the job is capable of in say 10 hours per week.

And remember, “If a job isn’t worth doing at all, then it isn’t worth doing well.”

Pedro d'Aquino July 12, 2011 at 8:12 am

This post is a nice addition to something I was reading in Greg Mankiw’s introductory textbook the other day. He writes that Rockefeller’s fortune would be worth $200 billion in today’s dollars, making him the richest american ever. Mankiw points out that, even though he had all that money, he didn’t have access to all the amenities of modern life — TV, internet, computers, advanced medicine, airplane travels, mobile phones etc. Mankiw then asks the reader if he would trade those innovations in exchange for $200 billion. If not, that means the reader is wealthier than Rockefeller was. The point is that statistics such as the GDP fail to capture some important aspects of the raising standard of living.

Morgan Warstler July 12, 2011 at 2:42 pm

The point is GDP is the wrong thing to worry about.

The fruits of the Internet have barely been reaped.

Tomasz Wegrzanowski July 12, 2011 at 8:14 am

You need willingness to accept, not willingness to pay, or you’ll massively underestimate surplus from Internet.

Either willingness is a massive underestimate, as people usually have multiple ways of accessing Internet,
so if they couldn’t access Internet at home, it would inconvenience them and they’d have to access it from
Internet cafes or at the office, it wouldn’t cut them off completely.

I think you’re very far off the mark here.

Thomas July 12, 2011 at 8:23 am

Well, if you ask somebody to give up his internet connection when everybody else is still online, the question is not so much “how awesome is the internet” but more “how big is my disadvantage compared to other folks in more and more areas of everyday life”. Even if this disadvantage wasn’t too big (and I think it really is big) it could very well lead to not getting a job you applied to without an email adress, not getting invited to that great party that was coordinated over facebook and so on. Saying all this is worth not getting a million dollars is not at all far fetched.
But that is not the same as consumer surplus due to the internet. If you reframe the question and ask people if they would take a million dollars and in exchange the internet gets shut off tomorrow for everybody, well, I’m pretty sure 99% of all people would agree in a heartbeat.

DF Sayers July 12, 2011 at 8:27 am

“You can take issue with these papers for ignoring personal internet use at work, the inframarginal benefits to infovores, or other issues, such as whether the existence of the internet increases workloads in what are supposedly leisure hours.”

What about the character of taxpayer-funded FCC consumer studies as a handout for the telecom industry?

No Name July 12, 2011 at 8:43 am

I bet Willing to Pay figures for electricity access wouldn’t capture the consumer surplus of electricity very accurately, either.

If people are asked “how much are you willing to pay for internet access” they’ll anchor the answers around whatever their current ISP bill is, even if they intellectually understand they’re not being asked about that.

Urso July 12, 2011 at 12:35 pm

I agree with the anchoring theory. Plus, if someone called me up and asked this question, I’d think “oh those bastards at Cox are running surveys to see if we’d accept a rate increase. I’d better lowball them.”

Perhaps I just have a suspicious mind.

wiki July 12, 2011 at 9:26 am

One way to think about it is how much even relatively wealth Americans (those who travel abroad) willingly pay for expensive internet access while traveling. The answer is: Not very much. Look at how many people put up with less internet than they’re used to or go out of their way to find a cafe with free wifi when hotel charges are on the order of $10 or $15 per hour. But since it often takes search plus travel time (say 15-30 mins) to get to these inconvenient locations that tells me it’s REALLY not worth more than a few hundred dollars a month for most people to have internet for several hours a day in the most convenient locations. And think of all the people who can’t afford to travel or who don’t bother to get smart phones or who pay for neither texting nor email.

The infovores are overvaluing themselves and the relative weight of their consumer surplus in the economy. Certainly compared to those who were heavy users of air travel (in for example the 1960s) or those who first encountered modern highways (1930s to 50s) or who benefited from mail order catalogs and phone books. And certainly compared to users of penicillin.

Dale July 12, 2011 at 11:44 am

wiki has it right. I use the internet as much as anyone I know, but when I travel I never pay an extra $10 to have access in my hotel room. Of course, I’d be willing to pay more if it was an all-or-nothing deal (i.e., lose total internet access) but remember consumer surplus is a “surplus” – you need to subtract the $50/month I already pay for my internet access (actually another $50/month for my smartphone access on top of that). Because I pay a lot it is safe to assume it is valuable to me – but my surplus only counts the excess of my willingness to pay over what I actually pay. I’m doubtful that this is a huge amount.

liberty July 12, 2011 at 9:26 am

I am not sure exactly how consumer surplus is usually measured, but how can someone accurately judge what they are willing to pay for something that they know right now to cost a certain (very low) amount. I might not feel like I am willing to pay more than, say $100/month for internet access right now, but this might be because (a) I know it is a lot cheaper than that right now, so $100/month sounds like a lot; (b) I have other options, including other technology that only exists because of the internet (cheap books due to Amazon, Ebay, etc.; better journalism due to cheap worldwide communication, etc.), (c) I can’t hardly imagine (or remember) what the world was like without/before the internet, and therefore can’t put a true price on the technology, which is as much about us all having it as about just me having it.

If people were forced to live without its use at all for a few months and then asked, we might have a better idea.

Slocum July 12, 2011 at 9:29 am

It’s not just ‘the Internet’, it’s the whole interlocking constellation of electronic devices, information and entertainment services for which the Internet serves as the backbone. The question, really, should be, how much would you have to be paid to live with no post-1975 electronics and services? No internet, no GPS, no personal computer (unless you wanted to build one from a kit), no mobile phone, no Kindle, no digital camera (or even analog video camera), no MP3 players, no Netflix (not even any VCRs), no computer games (beyond Pong). If you want to read a book, you’d better hope they have it at your local library or carry it at B. Dalton in the mall. If you want to see a movie after its initial run, forget it unless you live near a big city with a revival house. If you want to hear a song you don’t own, you could call the radio station and request it. Want to read a newspaper not published in your home town? Get off to the library. Skype, video-conferencing, telecommuting? What are those? Long-distance phone calls? Better be rich or call after 11PM. International phone calls? You can’t afford it.

Another way to measure how much all this is really worth (and to see that we’re not just talking about over-educated ‘informavores’) is to check how of their incomes people in developing countries are willing to pay for small subsets of all this. What percentage of their income are they willing to pay for satellite TV? For mobile phones?

Ted Craig July 12, 2011 at 9:49 am

Yes, but most people didn’t walk around in 1975 going “Man, this sucks.” (well, maybe they did, but for non-technological reasons). It’s all a question of what you get used to.

themusicgod1 July 17, 2011 at 4:07 pm

> (well, maybe they did, but for non-technological reasons).

Actually even those non-technological reasons were technological reasons. Every one of those problems had a technological solution, and the answer to getting them solved is going to be likely found online.

Noah Yetter July 12, 2011 at 9:42 am

#1 and #2 are rendered completely useless by Availability Bias. I’m willing to pay in the neighborhood of $60 a month for internet access because that’s what internet access costs. Regardless of how these figures were “calculated”, they are going to be poisoned by that market reality.

We pay somewhere around $300 a month for health insurance (for 2), which gives us much less value than the internet. If it cost that much, we would pay that much, and more.

Ben July 12, 2011 at 9:59 am

I would pay up to all of my available income for food and water if not paying meant no food or water. I don’t view drinking water from the tap as having a nearly infinite consumer surplus. As such, I don’t view being willing to pay 2x or 20x my current internet bill as indicating 20x of consumer surplus. It’s more an estimate of what is a relative need vs. a relative want.

blastomere July 12, 2011 at 4:45 pm

“all your available income” is very very far away from “nearly infinite.”

mark July 12, 2011 at 11:50 am

Idk, I think there is more consumer surplus than just the dollars one would pay for internet access. I think the internet provides a lot of information and search function that results in both lower prices paid by consumers for goods and services and superior satisfaction with what one buys. I guess the value of that to each person varies based on how much one spends and how much one uses the internet to guide you. In my case,it’s more than $60 a month.

The WTP approach assumes that 1) consumers are pricing at the absolute margin and 2) they are taking all consumer surplus into account when they do.. But I don’t know any reason to think that is really true, as opposed to being a postulate or theorem of the field.

Andrew' July 12, 2011 at 12:02 pm

4 percent ain’t no joke yo’. And I know people who only use the internet at work. In fact, most of the people I know are like that. They have internet at home, but the person paying the bills isn’t going to have a huge tolerance for paying more for it.

Also, this is the poster child for difficult to account for accounting. Double that 4 percent and pretty soon we aren’t sniffing at it.

Scoop July 12, 2011 at 12:41 pm

These academic measures are idiotic. What people say they are willing to pay for stuff bears zero relationship to what they are willing to pay for things. Consider circa 1985 the number of people who said they’d never pay for TV compared to the number now who shell out $100 a month for it.

1. Entertainment: Americans spend about a quarter of everything on entertainment and the Internet has increased the amount that’s available to you at any time by a factor of at least 10 but probably closer to 50.

2. Time savings: Does anyone remember how hard it was to get information? How much time do Americans save by not sitting through 30 minute newscasts to hear the weather and not staying up till SportCenter to get scores? How many things do you look up each day that once would have required a trip to the library? The library for God’s sake. My Christmas shopping now takes me less than an hour, per year.

3. Cheaper prices. Are all of these folks who report that the Internet is worth like $5 a month to them too stupid to save several hundred dollars a month by finding bargains online? Even if they are, they still benefit from Internet pricing because it constrains what merchants can charge. What did you save on the last car you bought? How about your last trip?

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wiki July 12, 2011 at 2:24 pm

People who object to consumer surplus are often arguing that different values are incommensurable. But then they don’t address the question of how to value the internet vs. say, telephones or antibiotics or airplanes or the post office. Economists have spent a lot of time on these “imperfect” measures and they are not ever going to be absolutely “correct.” But is there any evidence that underestimates of the net’s computer surplus are **worse** than for other great inventions? I haven’t read any comment that changes my mind on this. Indeed the feebleness of most criticisms of Tyler (which are often just attacks on econ or on all existing calculations) further raises the persuasiveness of his arguments in my mind. Someone needs to say why ANY plausible measure of the internet should give us a much bigger number than we already have relative to everything else we measure in GDP or consumer surplus, etc. At some point you’re either saying a) you shouldn’t do consumer surplus at all or b) you just like the internet a whole bunch and maybe you think you like it more than cars or antibiotics or what have you (**relative to what came before**).

Floccina July 12, 2011 at 4:11 pm

eighty five bucks a month seems low, I am a cheapskate and I am pretty sure that I would pay $300 if i had too.

mark July 12, 2011 at 5:29 pm

I just don’t buy the exclusive focus on the amount someone would pay the ISP. There is a lot more going on that is creating consumer surplus over the internet. The ISP’s fees are just part of it.

When I was a teenager, to get a hot concert ticket, I had to physically wait on line to buy one and it was usually awful. With the internet, I am much more able to get tickets and avoid the physical waiting, which is no longer practical. As a result, I attend several more than I would otherwise. I think you have to add the revenue Ticketmaster / Live nation collects to account for the value of the internet – it’s not just the ISP’s collections.

Arguably, I am merely displacing a person who would have waited on line. But the odds are a person who could wait on line would pay less for the ticket than a person who is too busy to wait on line. So there is some incremental GDP being created by the online buying.

Similarly, we pay UPS and FedEx to deliver packages to us that we order online. Is the value we pay them for all created by UPS and FedEx? Not so clear to me. They would not have the delivery assignment but for the Internet – I would have gone to a store myself and bought it. So again, there is some incremental GDP being created by the Internet, which winds up not in the ISP’s hands but in the couriers’.

blastomere July 12, 2011 at 5:29 pm

WTP (willngness-to-pay, for those not up on their worthless academic jargon) is a particularly silly measure in the case of the Internet. You won’t pay an extra $10 a day for special access in your hotel room when traveling? All that means is that you’re willing to do without the Internet on vacation (isn’t that what vacation is for, to get away from it all?). It’s like saying you don’t have much willingness to pay for books, and indeed books have never really added much value to the world, because you don’t read books on vacation. So therefore the “consumer surplus” or any other value from the printing press must have always been pretty small. It’s a terrible argument. And being willing to go without the Internet for a day or a week while on vacation is an extremely long way from being willing to go without it at the office or when trying to accomplish tasks like research for household tasks (how does one patch a hole in the wall or fix a small plumbing problem or put in a patio?) or shopping.

It may also mean, whether at home or office or on a business trip or on vacation, that you have cheaper alternatives: the iPhone you’ve already paid for or the Starbucks across the street from the hotel. Heck, in half the hotel rooms I’ve stayed in, I can get free wi-fi access in the room itself from a nearby business or some municipal service offering free wi-fi.

Asking people what they’d be willing to pay as a measure of value is one of the most idiotic things that social scientists have ever thought up, and that includes a great deal of preposterous territory.

Greg July 12, 2011 at 5:33 pm

Since when is aggregate WTP the only component of social welfare gain? Even if (improbably) people could make accurate off-the-cuff estimates of their own willingness to pay, the Internet obviously has more utility and cost-saving features than those available to end users.

Gaston July 12, 2011 at 11:35 pm

Great post! I was looking for the FCC paper.
Is there a paper that calculate the WTP´s differential in the between DSL and cable modem?

themusicgod1 July 17, 2011 at 4:02 pm

> Penicillin probably does have such an enormous inframarginal benefit; the initial doses can be of great value but past some margin the value falls to zero or negative. The internet doesn’t seem to be like penicillin.

Not sure about that…it was worth it for me to walk 2 hours with floppy disks in hand to get access to the network long before 99% of the content we have now was even available. I would probably give my *entire* paycheque to get access to the internet today if I absolutely had to(and my paycheques aren’t that small, each enough to probably buy a decent used car), and go into debt on top of that. I have gone without food and shelter in exchange for it, it is definitely that important in my life (for example…in the past, if you starved on a streetcorner you either a) didn’t have friends or people who could care about you halfway around the world who could help and b) even if you did, they probably didn’t know your dire situation to even help you). At the same time…everyone spending all their time on reddit probably does have negative marginal value on the group level, much like Penicillin(we all end up wasting a lot of time that might have gone to productive things, and drag eachother down).

You really don’t *need* much access to the net, an hour or two a day should suffice. After that the benefits diminish.

themusicgod1 July 17, 2011 at 4:03 pm

(I mean I would quickly download my email to floppy with any websites/usenet/etc materials for viewing at home)

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