Free exchange | Technology

What good is the internet?

Economists measuring the benefits of the web to consumers come up with a range of answers

By G.I. | WASHINGTON

THIS week's Free exchange column explores how much value the Internet creates that is not captured in GDP. Typically economists determine such non-monetary benefits by trying to calculate "consumer surplus": the difference between what a consumer pays and what they would be willing to pay. That is not easy, especially when so many Internet services such as search and social media are free and have no precise market based analog.

Measuring the economic impact of all the ways the internet has changed people’s lives is devilishly difficult because so much of it has no price. It is easier to quantify the losses Wikipedia has inflicted on encyclopedia publishers than the benefits it has generated for users...This problem is an old one in economics. GDP measures monetary transactions, not welfare. Consider someone who would pay $50 for the latest Harry Potter novel but only has to pay $20. The $30 difference represents a non-monetary benefit called “consumer surplus”. The amount of internet activity that actually shows up in GDP—Google’s ad sales, for example—significantly understates its contribution to welfare by excluding the consumer surplus that accrues to Google’s users. The hard question to answer is by how much...

Say that in 1999 a person pays $20 a month for internet access. By 2006 the spread of broadband has lowered the real price to $17. That subscriber now enjoys consumer surplus of $3 per year, even as the lower price lures more subscribers. The authors reckon that by 2006 broadband was generating $39 billion in revenue and $5 billion-$7 billion in consumer surplus a year. Based on its share of online viewing, Mr Greenstein thinks Wikipedia accounted for up to $50m of that surplus.

Such numbers probably understate things. The authors’ calculations assume internet access meant the same thing in 2006 as it did in 1999. But the advent of new services such as Google and Facebook meant internet access in 2006 was worth much more than in 1999. So the surplus would have been bigger, too.

More important, consumers may not incorporate the value of free internet services when deciding what to pay for internet access. Another approach is simply to ask consumers what they would pay if they had to. In a study commissioned by IAB Europe, a web-advertising industry group, McKinsey, a consultancy, asked 3,360 consumers in six countries what they would pay for 16 internet services that are now largely financed by ads. On average, households would pay €38 ($50) a month each for services they now get free. After subtracting the costs associated with intrusive ads and forgone privacy, McKinsey reckoned free ad-supported internet services generated €32 billion of consumer surplus in America and €69 billion in Europe.

Economists whose work is mentioned in the article have devised several techniques for measuring the web's consumer surplus. We asked some of them to comment and will post their responses over the next week. Do leave your own assessments in the comments.

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