Consumers’ Surplus and well-being

Another paper from the AEA session on measuring well-being. The abstract of the paper by Erik Brynjolfsson, Felix Eggers, and Avinash Gannamaneni says,

In principle, changes in consumer surplus (compensating expenditure) provide a superior measure of changes in consumer well-being than GDP and metrics derived from it, like productivity, especially for digital goods. In practice, consumer surplus has been difficult to measure. We demonstrate the potential of massively scalable online Single Binary Discrete Choice experiments for addressing this issue. These experiments provide a measure of consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the changes in consumer surplus from these goods. Drawing on several hundred thousand online experiments, our results indicate that digital goods have created substantial gains in well-being which are largely missed by conventional measure of GDP and productivity, and suggest that our approach can be scaled up to a broader set of goods and services. Two limitations of our methods are that they are much less precise than changes in GDP and they suffer from hypothetical bias. We show how much of an improvement in precision can be achieved with larger sample sizes and demographic controls and we document the direction and magnitude of hypothetical bias by conducting incentive compatible experiments with a smaller group of subjects. By periodically querying a large, representative sample of goods and services, including those which are not priced in existing markets, changes in consumer surplus and other new measures of well-being derived from these online choice experiments have the potential for providing cost-effective supplements to existing national income and product accounts.

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3 Responses to Consumers’ Surplus and well-being

  1. Matthew Young says:

    Consider what happens when we put our ATM card in the slot and key the passcode.
    We have given power of attorney to a software bot in the card chip. Signing the PIN is a legal signature, an agreement to obey the exchange protocol as a binding contract.

    If we expand the complexity of that exchange protocol a bit then we have a variety of ownership contracts we can assign to our ATM card. Our chip card can, for example, agree to keep 10% of our assets in a liquid cash account. Then our chip card can run our credit accounts, anywhere, because all banking counterparties know I have a legally binding contract to keep cash around. I am pre-qualified to borrow or save at some digital banks somewhere. My trading bot can use digital bearer cash, it responds to the savings to loan opportunities as they appear, without me looking all the time.

    What happens? HFT threat is gone, any of us can trade equally fair in any of the trading pits as any wealthy person.

  2. edgar says:

    Will assigning numbers to individual consumer surpus producing transactions, aggregating them, and then producing a Gross Consumer Surplus index meaningfully improve our understanding of anything? Hard to see how seeing the economony as a GCS + GDP factory is an improvement over seeing it merely as a GDP factory. Nope, just looks like another high priest end run around reality and human dignity designed to produce more mumbo-jumbo with which to justify nudges, impugn private transactions, and justify priestly rule. The more of these proposed reforms I see, the more convincing appears the case that macro is but an occult science that needs to retire to the cave from which it emerged.

  3. Candide III says:

    Consumer surplus ≠ well-being. Consider opioids in the North-east and Midwest. Spending on them unquestionably counts towards GDP, and it is a good bet that GDP figures underestimate consumer surplus from opioids. So what? You have written yourself that FaceTwitInstaSnap aren’t such an unmixed blessing, so whatever the figure for consumer surplus from them, it may detract from well-being just as readily as add to it.

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