Consumer surplus from the internet, revisited

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.


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