Friday, April 22, 2011

How much is that laptop worth?

Much more than you paid for it, especially if you have had it for a while.  A recent article in Slate examines how much consumer surplus is derived from computer ownership and internet access.  If one buys a new computer every four years and has a $40/month internet connection, the package costs roughly $700/year.  But the article raises the provocative question: suppose someone stole your computer and hacked your connection -- how much would you pay to get them back?  The difference between this ransom (annualized over the expected lifetime of the computer) and $700/year equals consumer surplus.

Before he became an economic advisor to the President, Austan Goolsbee (then at the University of Chicago) estimated that only 0.2 percent of income went to computers and internet access, but since people spend 10 percent of their leisure time online, the value of the internet is closer to 2.0 percent of income. 

Key implications: (1) competition in computer manufacturing and internet access yields big gains for consumers and (2) we really are a bit better off than the GDP statistics say we are. 

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