‘Tis the Season for Deadweight Losses. Should We Care?

There’s nothing like the Christmas season: sparkling trees, family gatherings, hot cocoa, red noses, snowflakes, sledding, snacks, and, of course, deadweight losses.

Deadweight losses? On Christmas morning?

In 1991, Yale University’s Joel Waldfogel informed us in The American Economic Review that, based on two surveys of his students, “holiday gift-giving destroys between 10 percent and a third of the value of gifts,” which, across the economy totals to something like $10-$30 billion per year (and this was in 1991). I can only imagine how much more it is now, since prices have more than doubled since then.

I say, Bah! Humbug!

But first, hear Joel, and his fellow Scroogeconomists, out.

In economics, a deadweight loss is as bad as it sounds. Definitionally speaking, it’s the cost incurred by market inefficiency, which happens when supply and demand are thrown out of equilibrium. Here’s an example.

Let’s say Aunt Tilley from Kansas City arrives with matching sets of cherry red and chartreuse green mohair moose sweaters for the whole family, each of which set her back $100. Junior unwraps his gift, notices the price tag she forgot to remove, smiles weakly, thanks her, and thinks, “Ugh. I wouldn’t pay $10 for this. Why didn’t she at least give me a $100 Mayfair mall gift card!?”

That, according to Waldfogel, is $90 thrown down the drain, and he uses what economists call “indifference curves” to demonstrate it. And the logic doesn’t stop at Christmas: birthdays, anniversaries, home-made chocolate chip cookies to a college freshman, house-warming gifts for a new friend. If you really want deadweight losses to be zero, you need to pivot: just acquire a stack of Ben Franklins and hand those out instead.

I get it. We’ve all gotten some iffy gifts. Because of a mixture of ignorance and perhaps a smidge of paternalism (“Junior really should play less video games; he really needs to read How To Win Friends and Influence People”), gift givers make mistakes. I certainly have. A very long time ago I gave my older brother a frozen porterhouse steak for Christmas, though I swear he liked it.

On this issue, economists have simply gone too far. Think about it: Do we really want everyone to exchange various gift cards—or worse, greenbacks—on Christmas morning?

Imagine the scene:

Jim extends his envelope: “Hey, Bill; here’s $50.”

“Thanks, Jim; here’s a $50,” replies Bill.

Or worse: “Thanks, Jim; ugh…here’s a $20,” as Jim does some quick mental math and Bill’s cheeks turn red.

Yes, monetary gifts are fool-proof, in a way. We don’t have to do the research about what people really enjoy, what emerging hobbies or tastes they’ve acquired; besides, since time is money, the transaction costs of researching friends and family members’ wishes are a real cost.

Or a real joy. And so are the insights you gain from a better connection to loved ones. Maybe, just maybe—your $20 gift might bring such a surprised delight to the recipient that they value it at $100! You both feel an airy, helium weightlessness as their genuine smile turns into a life-long hobby, or a realization that someone “gets you.” And even if the gift you receive doesn’t quite hit home, someone at least cared enough to knit you that afghan or searched high and low for just the right antique tea cup for your shelf, which may, truth be told, be placed in your “re-gift” drawer.

My wish for everyone is a pile of imperfect gifts, with the realization that someone just might “get” you; and if they don’t, they cared enough about you to have given it their very best shot.

Here’s to a Christmas with lots of surprised delights, genuine joy despite a wee bit of deadweight costs, and perhaps a new year where economics professors find more substantive areas to research.

The post ‘Tis the Season for Deadweight Losses. Should We Care? was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.