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The Role of ICT in Economic Development – A Partial Survey
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Bog'liq zef dp07The Role of ICT in Economic Development – A Partial Survey
26
However, the Marshallian surplus is not an exact measure of welfare. The appropriate
demand curve to use for exact consumer surplus is the compensated demand curve, i.e., a
demand curve adjusted so as to maintain the same utility level before and after the price change.
In the case of a log-linear demand function, the consumer surplus associated with the
compensating variation in income (
CVI
) principle may be calculated as:
34
δ
α
α
γ
δ
α
δ
−
+
+
−
−
+
−
+
=
1
1
1
0
1
1
1
)
(
)
1
(
)
1
(
p
p
e
y
CVI
.
(10)
The additional terms in this expression compensate for the change in real income due to
the price decline. These two methods of calculating consumer surplus are based on the
estimation of a parametric demand curve. Imposing such a restriction on the shape of the
demand curve may not be appropriate and may lead to misleading estimates. An alternative is to
compute consumer surplus using non-parametric methods (see Varian, 1993).
The fourth method is based on the idea that consumer welfare is captured by the increase
in utility resulting from changes in prices and consumption. Accordingly, instead of relying on a
demand function, one may use a utility function to derive a measure of welfare. Based on a
translog utility function and some results from the theory of index numbers, Bresnahan (1986)
derives such a measure. The measure of consumer welfare associated with such a utility
function may be represented as:
)
/
log(
)
(
2
/
1
1
0
0
1
p
p
S
S
+
(11)
where
S
i
(
i
= 1,0) is the share of IT in total expenditure in the final and initial period,
respectively.
Brynjolfsson (1994) uses data on 8 US industries for the years 1975 through 1987 to
compute these four measures of consumer surplus for computers. The results are remarkably
consistent across methodologies and are quite robust to some of the specification tests conducted
by the author. Using 1987 as the base year, the estimates suggest that the consumer surplus
associated with computers ranges between $50 – $70 billion. When compared with the
expenditure on computers ($ 25 billion in 1987), it is clear that the diffusion of computers has
generated substantial benefits.
In another study, Bresnahan (1986) uses the index number method to calculate the
benefits derived from the spread of mainframe computers in the financial services industry.
While pointing out that benefits derived in the financial sector may not generalize to other
sectors, the paper reported that in current (1986) terms, the benefits derived from the quality-
adjusted price decline in these computers generated benefits on the order of 1.5 to 2 times the
expenditure.
34
Consumer surplus based on
CVI
may be computed by integrating the demand function to obtain the money metric
utility function, which can be used as the basis for calculating exact consumer surplus (see Varian, 1992, for the
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