This Article is your consumer surplus

Four ways to convince yourself the internet is making you richer

March 8, 2013
Obsession
Modern States
March 8, 2013

Worried about stagnant wages in developed economies? One source of consolation:  The consumer surplus provided by the internet—e-mail, social networks, free news and entertainment, online games—that isn’t measured by economic statistics. Sure, you’re not making as much money as your parents, but at least you have access to the 8 years of free video uploaded to YouTube every day.

The Economist has surveyed the literature to come up with several estimates of the unrecognized internet gains:

  • The falling cost of broadband: “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.”
  • What people would pay for all the stuff that’s 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. E-mail accounted for 16% of the total surplus across America and Europe, search 15% and social networks 11%.”
  • Time saved looking up information: “Hal Varian, Google’s chief economist, then calculated that those savings worked out to 3.75 minutes per day for the typical user. Assigning that time a value of $22 per hour (the average wage in America), he reckons search generates $500 of consumer surplus per user annually, or $65 billion-$150 billion nationally.”
  • If you measure the benefit by how people actually value their time: “The authors conclude that in so far as consumers must have valued their time on the internet more than the alternatives, this increase must reflect a growing consumer surplus from the internet, which they value at $564 billion in 2011, or $2,600 per user. Had this growth in surplus been included in GDP, it would have raised economic growth since 2002 by 0.39 percentage points on average.”

These kinds of calculations may be cold comfort when you look at charts like this, but it’s also important to recognize that there is real value in what new communications technology allows people to do. A skeptic of the internet’s consumer surplus still estimates its value in the United States 2 to 4% of GDP, which is a nice boost, but not enough to make up for the slowdown in growth, and productivity growth, over the last thirty years.

Still, none of these studies can accurately capture the intangible joy that comes from watching things like this. (Spoiler alert: It’s a bucket of sloths.)

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