The Role of ICT in Economic Development – A Partial Survey

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4.2.3 Benefits of ICT – consumer surplus
An alternative method of assessing the effect of these technologies is to examine the
welfare effects (consumer surplus) associated with their use. The assumptions underlying this
approach are that decision-makers are rational and able to understand their activities better than
others, and that the money which they are demonstrably willing to spend on these technologies is
at least a minimum measure of the worth of these technologies. Using this rationale, one can
calculate the internal rate of return (IRR) and use it as an indicator of the worthiness of a
particular investment. However, due to the externalities associated with these technologies and
the possibility that consumers may actually benefit more than they pay for a technology, the IRR
is often supplemented by estimates of consumer surplus.
While consumer surplus, defined as the gap between the price users are willing to pay
and the price they actually pay, is quite a simple concept, there are a number of ways of
operationalizing it. Several papers have calculated the consumer surplus associated with ICTs,
albeit focusing more on telecommunications than on computers. Here, studies of both types are
discussed.
4.2.3.1 Consumer surplus and telecommunications
Saunders
et al
. (1983) provide details of several studies that have estimated the consumer
surplus associated with telephone calls. For instance, a study conducted in Costa Rica in 1976
calculates consumer surplus by estimating a part of the demand curve for telephone calls. By
observing the response of users to a price increase, the authors compute the price elasticity of
demand and the associated decrease in consumer surplus. Adding the reduction in consumer
surplus to the original revenues (those in effect prior to the price change) provides an idea of the
pre-price-hike benefits associated with telephone calls.
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The study in Costa Rica was carried out in somewhat greater detail, using data from 92
public telephones in 82 villages. Based on changes in call traffic following a tariff hike of 25
percent from 12 to 15 centimos per pulse, the average price elasticity in these villages was
estimated to be about -0.5. Thus, a village that used 100 pulses per day before the hike would
now use 87.5 pulses, with a corresponding decline in consumer surplus of 2.81 colones per day
(87.5 x 3 + 1/2 x 12.5 x 3). Adding this loss in consumer surplus to revenue yields a pre-price-
hike benefit of 14.81 (12 + 2.81) colones per day, suggesting that measured revenues represent
only 81 percent of the benefits received by phone users.
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These estimates are based on demand analysis. As the authors point out, in developing countries where demand
is seldom met, observations of price and quantity rarely represent points on the demand curve. Nonetheless, since
what users actually pay for services reveals at least part of their valuation of the benefits received, the empirical
observation of points on the supply curve can yield some insight into consumer surplus.
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