Is the internet a bargain?

I think one of the more important changes that has happened in our economy of late is the amount of consumer surplus we get from the internet, smart phones, iPads, etc.  Note I am not simply making the obvious statement that “the internet is great.”   Consumer surplus is the difference between what you are willing to pay for something and what you actually pay.  I am going to claim most of us pay a lot less for the internet (and smart phones, iPads, etc.) than we would be willing to.

So, what is your “consumer surplus” for the internet.  First, imagine someone (in the mafia?) stands outside your house, threatening to cut-off your internet unless you pay up.  How much would you pay for him not to cut you off?  $100 per month?  $500?  Second, look at your bill and see much you actually pay.  Your consumer surplus is the difference in these amounts.  I bet you are not paying as much as you are willing to pay.  Can you see the enormous consumer surplus we get for these technological advances?

This is an excellent article you should read on this topic.  I will quote several paragraphs:

We currently pony up, say, $800 on hardware and $40 a month on an Internet connection. If you buy a computer every four years, that works out to about $680 a year. But we spend thousands of hours per year at leisure and doing household tasks on our home computers. We comparison shop for products from around the world, ignore poems from Aunt Millie, keep our finances in order, play fantastic games, and read newspapers in Hindi. Those activities must be worth more than just a few hundred bucks to us, given how we spend money on other things.

I would add that you read fantastic blog posts too on the internet.

The thing is, none of the consumer surplus is accounted for in the GDP numbers.  Computers are getting cheaper while the benefits of computers grow.  This leads to even higher consumer surplus. Again:

…we seem to derive enormous uncounted benefits from our computers and the Internet, benefits that lie outside of the traditional metrics of GDP, spending, and income.

Economists have tried to quantify this:

Thus many economists have tried figuring out the “consumer surplus”—the fancy academic phrase for “benefits you get that you don’t pay for”—of computers and the Internet. (There’s a whole other literature devoted to explaining the value of computers to businesses.) For instance, Brynjolfsson zeroed on the impact of online booksellers such as Amazon. He and his co-authors noted that the sheer variety of books available online, rather than in bricks-and-mortar stores, provided benefits to consumers. The math gets complicated, but essentially, Brynjolfsson and his co-authors figured out “how much a pre-Internet consumer would need to be compensated to be just as well off as he or she would be after the emergence of online markets,” which gave her the new ability to get a rare title at fair market price almost instantaneously. All the way back in 2001, he estimated those benefits as worth from $731 million to $1.03 billion, seven to 10 times the benefit of lower book prices caused by Internet competition.

You should read the whole thing.  Previously I wrote how the benefits of ethnic food variety are not captured by GDP either.

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3 Responses to Is the internet a bargain?

  1. Conor says:

    Not to mention the fact that internet + espn3.com + netflix + hulu plus ($8 a month each) means you can dump the cable subscription 🙂

  2. Also, keep in mind that the cable and internet companies do a pretty good job of price discrimination within the limits of the law, so they are really trying to extract surplus!

  3. Pingback: Is the Internet killing jobs? | Not One Square Inch

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