Sunday, December 21, 2008

'Tis the Season for Deadweight Loss

What would Christmas be if some economist didn't point out the social inefficiency of the gift giving season? Or discuss it as a signaling game?

What is the deadweight loss of Christmas? In short, economists think of a good that goes unpurchased because the consumer does not value it at market price. Thus, when you buy someone a gift, it's cost was greater than the dollar value of the utility gained to the recipient. A study of Yale students revealed that they valued the presents they received 10% to 30% less than their estimated market price.

My criticisim of this analysis is that I think that the saying "it is better to give, than to receive" holds extremely well here. In short, you have two consumers of the same product but the 10-30% estimate only measures the recipient's consumer surplus. When one purchases a gift, they believe it carries positive consumer surplus at a zero price for the recipient, and then the giver draws utility as some function of that consumer surplus. So even though individually neither of them may value that item at its market value, collectively it may be enough to offset the deadweight loss.

1 comment:

Heather Phillips said...

That's assuming, of course, that there is no NEGATIVE utility in receiving the gift. For instance, the fugly "decorative" objects given to me every year by my oblivious sisters-in-law. I'd really rather they just keep the crap so I don't have to worry about finding some sucker...er,...person to take them off my hands.