How do we measure the benefits of free goods or services?

Sales of music on physical media declined from 800 million units in 2004 to less than 400 million units in 2008. Yet over the same time period total units of music purchased still grew, reflecting an even faster increase in the purchases of digital downloads. Digital streams such as iTunes, Spotify, or Pandora also came to prominence, and, of course, the purchase data don’t reflect the even larger number of songs that were shared, streamed, or downloaded for free, often via piracy.

Before the rise of the MP3, even the most fanatical music fan, with a basement stacked high with LPs, tapes, and CDs, wouldn’t have had a fraction of the twenty million songs available on a child’s smartphone via services like Spotify or Rhapsody. What’s more, clever research by Joel Waldfogel at the University of Minnesota finds quantitative evidence that the overall quality of music has not declined over the past decade and is, if anything, higher than ever. If you’re like most people, you are listening to more and better music than ever before.

So how did music disappear? The value of music has not changed, only the price. From 2004 to 2008, the combined revenue from sales of music dropped from $12.3 billion to $7.4 billion—that’s a decline of 40 percent. Even when we include all digital sales, throwing in ringtones on mobile phones for good measure, the total revenues to the record companies are still down 30 percent.

Similar economics apply when you read the New York Times , Bloomberg Businessweek, or MIT Sloan Management Review online at a reduced price or for free instead of buying a physical copy at the newsstand, or when you use Craigslist instead of the classified ads, or when you share photos via Facebook instead of mailing prints around to friends and relatives. Analog dollars are becoming digital pennies.

By now, the number of pages of digital text and images on the Web is estimated to exceed one trillion. Bits are created at virtually zero cost and transmitted almost instantaneously worldwide. What’s more, a copy of a digital good is exactly identical to the original.

This leads to some very different economics and some special measurement problems. When a business traveler calls home to talk to her children via Skype, that may add zero to GDP, but it’s hardly worthless. Even the wealthiest robber baron would have been unable to buy this service. How do we measure the benefits of free goods or services that were unavailable at any price in previous eras?

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