Joo Hee Oh

We develop a framework to measure the value of free goods and services available on the internet. The conventional method of measuring consumer surplus based on monetary expenditures is ineffective because these goods’ prices are predominantly zero. As the saying goes, time is money, and thus, our method addresses this challenge by quantifying the value of the time that consumers devote to consuming these free goods. We apply our model to data on the allocation of individuals’ time among internet, television, leisure, and work, and this enables us to estimate the consumer surplus of free goods. We find that the average incremental welfare gain from the internet for each year between 2002 and 2011 was about $38 billion per year in the United States, which is equivalent to approximately 0.29% of the annual GDP. In contrast, if we had not considered the value of time, then the estimated annual incremental welfare gain would have been only $2.7 billion, which is barely 7% of the estimate derived from our model, which considers the time spent on consuming these goods. Our approach can be readily extended to the valuation of other zero-priced goods and services, such as television. In addition, our results show the importance of not only quantity but also quality (e.g., internet speed) in determining the welfare contributions of free goods.