Aurora Borealis
1 August 2013 CFA Institute Journal Review

Net Benefits (Digest Summary)

  1. Mathias Moersch

Several approaches can be used to measure the economic benefits of internet use by consumers. The detriments of internet use should likewise be the subject of quantification.

What’s Inside?

Several recent research papers have explored and tried to quantify the benefits that the internet generates for consumers. But the quantification of these benefits is difficult because they cannot be observed directly. The author discusses four approaches used by various researchers. One approach is to estimate a demand curve and then assess the consumer surplus that accrues (consumer surplus is the difference between the price that consumers are willing to pay and the price they are required to pay). The author cites research on the spread of broadband access that estimated a consumer surplus of between $5 billion and $7 billion annually.

Another approach is to ask consumers what they are prepared to pay for internet services that are currently free. A third approach applies a dollar value to the amount of time saved as a consequence of faster access to information via the internet, which was estimated in another study to be $65 billion–$150 billion annually for the United States alone. A final approach is to put a financial value on the leisure time spent online; one estimate the author quotes quantifies this value at $564 billion annually.

How Is This Article Useful to Practitioners?

The widespread use of the internet has changed both the way people work and the way they spend their leisure time. Attempts to put dollar values on these developments can lead to a better understanding of both their macroeconomic importance—for example, the size of the overall effect relative to GDP—as well as microeconomic implications, such as the willingness to pay for services.

Equally important is finding a way to quantify the detriments to society of increased internet use, for example, the costs to employers of employees wasting time online.

Abstractor’s Viewpoint

Trying to quantify the benefits and the detriments of new technology is a laudable and essential exercise. The benefits of new technology cannot be assumed without careful analysis of the available facts surrounding its implementation. Nevertheless, given the fact that consumer welfare is an unobservable variable and a number of assumptions are needed to arrive at an estimate, the numerical results in the article should be treated with considerable caution. It is not surprising that the values obtained by the different studies vary greatly.

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