Nova workboard

a blog from young economists at Nova SBE

The Microeconomic Value of Internet

Internet is just everywhere at anytime. Teens constantly look to their parents and ask themselves “When they were of my age, how could they live without internet?” How could they live without Facebook, Google or Wikipedia?”. In truth, how much is internet or its platforms valuable for us? How would be our life today without it?

Economists used these questions to calculate the value of internet and its applications, not without some difficulties first. Trying to quantify how internet changed our life is hard because many changes had no price, another problem is that measuring the value of a good is much harder than measuring its cost, due to the question “How would be our life today without it?”. Two methods to measure the monetary value of a good or service are the “compensating variation” and the “equivalent variation”. The compensating variation estimates the maximum amount we would be willing to pay to have the good, while the equivalent variation estimates the maximum amount we would be willing to accept to let go of the good.

One way to measure the value of online search would be to measure how much time we save compared to the methods that we used before Google, those ones like searching in big books in big libraries. University of Michigan researchers found that answering the question “In making cookies, does the use of butter or margarine affect the size of the cookie?” using a library took 22 minutes (ignoring the time of going to the library that can be substantial) while answering them using Google took 7 minutes, approximately. Google saved 15 minutes. Hal Varian, chief economist at Google, converted this time to dollar savings using the average wage, and estimated $500 per adult a work year, $1,37 a day.

Now that the cost of getting questions is so low, we ask a lot more questions. In other times, we would just go to the library if the question was really important. Hal Varian took this effect into account and used it to estimate a “demand curve for questions” as a function of the “cost of getting answers”, he obtained $1,37 per day. (i.)

Another way to calculate the value of internet is through the consumer surplus. The consumer surplus is “an economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good relative to its price” (ii). Shane Greenstein from the Northwestern University and Ryan McDevitt of the University of Rochester calculated the consumer surplus generated by the spread of broadband access (that includes the surplus generated by internet services, for which the consumers pay for the broadband). If a person in 1999 paid $20 a month for internet access and in 2006 paid $17, there would be a consumer surplus of $3 per year. The researchers estimated that in 2006 broadband was generating $39 billion in revenue and $5 billion in consumer surplus a year. But this numbers probably underestimate its value, internet in 1999 was not so valuable as in 2006, thanks to new platforms like Facebook and Google. (iii.)

There are other ways to estimate the value of the internet and the services it provides, but those others methods will probably underestimate its value, principally because they do not take into account its long-term value. In the future, the big human step of passing to have access to all information ever produced will be considered a turning point in human history and the economic advances generated by global access to all information will be considered the true value of the internet.

Marli Fernandes

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Author: studentnovasbe

Master student in Nova Sbe

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