Lectures in Microeconomics-Charles W. Upton Pricing the Internet

Internet Demand and Supply Q*Q free c* The Internet is a wonderful idea, but it costs money to operate. If we were smart we would charge people for using the Internet

Pricing the Internet Internet Demand and Supply Q*Q free c* Demand for Internet Traffic at KSU

Pricing the Internet Internet Demand and Supply Q*Q free c* Cost/M B sent

Pricing the Internet Internet Demand and Supply Q*Q free c* Cost/M B sent Where we would be if we charged for use

Pricing the Internet Internet Demand and Supply Q*Q free c* Cost/M B sent Where we would be if we charged for use Where we are

Pricing the Internet Internet Demand and Supply Q*Q free c* Why? Because the Internet is free! Not surprisingly, we get abuses

Pricing the Internet Downloading the Latest Flick Q*Q free c* Joe College, sitting in his dorm room, is considering downloading a DVD of the latest hit movie.

Pricing the Internet Downloading the Latest Flick Q*Q free c* Joe College, sitting in his dorm room, is considering downloading a DVD of the latest hit movie. Obviously Joe is not deterred by the law, perhaps because he believes his chances of being caught are small.

Pricing the Internet Downloading the Latest Flick Q*Q free c* Joe College, sitting in his dorm room, is considering downloading a DVD of the latest hit movie. Obviously Joe is not deterred by the law, perhaps because he believes his chances of being caught are small. Legal issues aside, Joe has no incentive to economize on internet use.

Pricing the Internet Downloading the Latest Flick Q*Q free c* Joe College, sitting in his dorm room, is considering downloading a DVD of the latest hit movie. Obviously Joe is not deterred by the law, perhaps because he believes his chances of being caught are small. Legal issues aside, Joe has no incentive to economize on internet use. And the problem is worse. Others cannot get on because Joe is Hogging the Internet.

Pricing the Internet Downloading the Latest Flick Q*Q free c* Query: are people who argue for keeping the internet free guilty of promoting a crime (illegal downloads)?

Pricing the Internet Downloading the Latest Flick Q*Q free c* Query: are people who argue for keeping the internet free guilty of promoting a crime (illegal downloads)? Probably not, but the making the internet free is directly responsible for the high level of illegal use and (in part) for ever higher tuition charges.

Pricing the Internet The Information Superhighway The Internet is called the “information superhighway” and the comparison to superhighways is apt.

Pricing the Internet The Information Superhighway The Internet is called the “information superhighway” and the comparison to superhighways is apt. Increasingly the internet is subject to congestion, with slow access speeds at times.

Pricing the Internet Congestion on the Internet University use for downloads Spam

Pricing the Internet Congestion on the Internet University use for downloads Spam A warning: downloading movies and copyrighted audio material is illegal and potentially subject to legal penalties

Pricing the Internet Congestion on the Internet University use for downloads Spam A warning: downloading movies and copyrighted audio material is illegal and potentially subject to legal penalties But people still do it. Should we rely on fines or market incentives?

Pricing the Internet The Expressway at Rush Hour ATT MTT Q c Total c Joe

Pricing the Internet The Expressway at Rush Hour ATT MTT Q c Total c Joe The more trips, the longer the time a trip takes

Pricing the Internet The Expressway at Rush Hour ATT MTT Q c Total c Joe But lets also look at marginal trip times.

Pricing the Internet The Expressway at Rush Hour ATT MTT Q c Total c Joe True cost is not just the time of Joe’s trip but the time he adds to everyone else’s trip.

Pricing the Internet The Expressway at Rush Hour ATT MTT Q c Total c Joe True cost is not just the time of Joe’s trip but the time he adds to everyone else’s trip. If Joe’s 20 minute trip adds 1 second to the travel times of another 25,000 commuters, the true time cost of his trip is over seven hours.

Pricing the Internet The Expressway at Rush Hour ATT MTT Q c Total c Joe True cost is not just the time of Joe’s trip but the time he adds to everyone else’s trip. If Joe’s 20 minute trip adds 1 second to the travel times of another 25,000 commuters, the true time cost of his trip is over seven hours. This is an externality, pure and simple.

Pricing the Internet Ditto for the Internet D ATT Q* c* Let’s suppose we charged people for average trip time

Pricing the Internet Ditto for the Internet D ATT Q* c*

Pricing the Internet Ditto for the Internet D ATT MTT Q* Q** c* c** cTcT

Pricing the Internet Ditto for the Internet D ATT MTT Q* Q** c* c** cTcT We have overuse of the internet because of the externality. People see the average time to send a message, not the marginal time

Pricing the Internet The Solution: Charge D ATT MTT Q* Q** c* c** If the internet were really owned, people would see the marginal cost of sending a message.

Pricing the Internet The Solution: Charge D ATT MTT Q* Q** c* c**

Pricing the Internet Back to Joe College Q*Q free c* Our discussion of Joe did not consider congestion charges.

Pricing the Internet Back to Joe College Q*Q free c* Our discussion of Joe did not consider congestion charges. It should have

Pricing the Internet Congestion is anti-social ATT MTT Q** c KSU c Joe In Fact, Joe is congesting the information superhighway. We don’t charge Joe for that.

Pricing the Internet Congestion is anti-social ATT MTT Q c Total c Joe It is not just that he doesn’t pay C Joe. He does not pay for the costs imposed on us while he downloads the latest heavy metal album.

Pricing the Internet Congestion is anti-social ATT MTT Q c Total c Joe It is not just that he doesn’t pay C Joe. He does not pay for the costs imposed on us while he downloads the latest heavy metal album. This is environmentally irresponsible

Pricing the Internet SPAM America ATT MTT Q c Total c Joe

Pricing the Internet SPAM America ATT MTT Q c Total c Joe True cost of the message is the time added to other messages.

Pricing the Internet SPAM America ATT MTT Q c Total c Joe True cost of the message is the time added to other messages. If Joe’s Spammer’s 10 million SPAM Mails adds trip adds 0.01 second to access times of another 25,000,000 users, the cost of his message is enormous

Pricing the Internet SPAM America ATT MTT Q c Total c Joe Why this error? Congestion is an externality, and Joe does not have to pay the costs he imposes on others.

Pricing the Internet SPAM America ATT MTT Q c Total c Joe Why this error? Congestion is an externality, and Joe does not have to pay the costs he imposes on others. Query: are people who argue for keeping the internet free guilty of promoting spam?

Pricing the Internet SPAM America ATT MTT Q c Total c Joe Why this error? Congestion is an externality, and Joe does not have to pay the costs he imposes on others. Query: are people who argue for keeping the internet free guilty of promoting a crime (illegal downloads)? Well, the mispricing is directly responsible for internet congestion and the high level of illegal use.

Pricing the Internet SPAM America ATT MTT Q c Total c Joe Pricing works. While we grumble about junk “snail mail”, we do not have the same problem there as with SPAM. Junk Mailers pay for each message.

Pricing the Internet End ©2004 Charles W. Upton