How Much Is the Internet Worth?

Tyler Cowen comments on several empirical studies. First:

Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by $731 million to $1.03 billion in the year 2000, which is between seven to ten times as large as the consumer welfare gain from increased competition and lower prices in this market. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware.

Here is the paper, the pointer is indirect through Tim Harford. Do read my previous post -- relevant for the wage stagnation debate -- on how much the Internet is worth.

$1 billion in enhanced consumer welfare, merely from book sales. Imagine how much greater it is for online music sales, or clothing sales. The previous post:

For some goods, the main cost of buying the product is not the price but rather the time it takes to use them. Only about 0.2% of consumer spending in the U.S., for example, went for Internet access in 2004 yet time use data indicates that people spend around 10% of their entire leisure time going online....we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars per user. This is an order of magnitude larger than what one obtains from a back-of-the-envelope calculation using data from expenditures.

Here is the paper. I call it a good start, but let us not forget the Internet also brings price closer to marginal cost in many markets. Your on-line searching has external benefits for others. Or how about another paper: "What is the iPod worth?" TiVo? The more we are changing the use of our time, the less we can trust real income statistics.

Those external effects cannot be ignored, but they are difficult to quantify, as are the benefits from moving markets closer to perfect competition. Still, this sort of empirical work is a necessary counterpoint to those who wish to tax the internet, a movement which appears to be picking up steam. When it happens -- I'm just assuming it eventually will -- it will take consumer benefit from individuals to fund programs which likely won't provide nearly as much consumer benefit, so society will incur deadweight loss. Not only that, but it could be regressive, since poorer people often use the internet to buy discounted goods, for cheap/free entertainment, or for purposes of education. Richer people can afford to use non-internet means for all of those, and are often willing to pay a price premium in exchange for quicker delivery (i.e. shopping in a retail store rather than waiting for internet delivery). It seems likely that, no matter the scheme, method of collection, or programs financed with the revenue, internet taxes will be highly inefficient.