Wednesday, 07 November 2018 17:01

The Deadweight Loss of Christmas

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Christmas is coming (queue a chorus of voices decrying Christmas displays in shops from August and the commercialisation of the Christmas season). But as you open yet another ill-fitting knitted jumper and garish pair of socks from great aunt Gertrude, have you ever wondered about the “efficiency” of your gifts? Confused? Let me explain.

 

In general, economists like consumers to have free choice as this ensures the highest possible utility (benefit or happiness). If someone gives you a gift that cost them £50, it might be the very best thing that you could think of to spend the money on. You would get the same utility from the gift as you would have done if you had been given £50 in cash and spent the money yourself. If you are really lucky, the person might know you even better than you know yourself and buy you something that you would never have thought of. In this case, your utility is higher than if they had given you the cash. The “efficiency” of this gift is greater than 100% if you will.

Of course both these scenarios are unlikely. It is far more likely that they give you a mulled wine scented candle and another copy of the book you still haven’t got round to reading from last year. In this case, the utility you get is rather lower than if they had simply given you cash.

The Centre for Retail Research estimated that total Christmas spending in the UK in 2016 would reach over £77bn. How much of this is wasted by buying gifts that the recipient does not fully value? How much value do we destroy by spending money on gifts that are at best, second choice alternatives? This is what Waldfogel describes in his article as the ‘deadweight loss of Christmas’. If you would only have spent £10 on that £50 gift, then the deadweight loss is £40. You would have got the same benefit if they had given you £10 in cash and kept the £40 for themselves or, to put it another way, they have just succeeded in destroying £40 of value.

Buy bringing together the results of two studies, Waldfogel estimates that the value of this deadweight could be as much as 1/3. In other words people only benefit to the tune of £33 for every £50 spent on gifts, or to put it yet another way, rather than spreading Christmas cheer, that £77bn in gift giving succeeded in destroying £25bn in value.

“But I don’t by many presents anymore”, I hear you cry. “I buy gift cards.” Well gift cards give us another insight into just how big this deadweight loss might be. There are various sites that will allow buy your gift card in return for cash. £41.75 for a £50 John Lewis gift card, £37.70 for Debenhams, or just £32.20 for book tokens. Even though a gift card is almost as good as cash in many ways, and despite their growing popularity with givers, the going rates on CardYard show just how much less recipients value these gifts. Even for a store with everything, such as Amazon, shoppers are prepared to give away 10% of its face value to convert it in to cash.

The lesson from this then, is surely that you should reduce your Christmas budget, give cash to your friends and family and make everyone a bit better off? Well that assumes you think the real value of the gift is in the price. It may of course be that some of the utility is from the gift itself, but much more is from the knowledge that the giver cared enough about you, and knew you well enough, to pick out a gift you would like. That giftwrapped box is not just a giftwrapped box, but a tangible reminder of a valuable relationship. If this is true then the “deadweight loss of Christmas” might be much smaller than Waldfogel imagines and despite the best efforts of the economist who tried to steal Christmas, we can get back to buying each other presents safe in the knowledge that we have not traded our rationality for sentimentality and a glass of Christmas cheer (great aunt Gertrude’s jumper aside).

 

 

 

What to do next?

 

  • If you have not yet studied indifference curves, you may want to look at this video first.

 

  • Micheal Sandel considers this along with other examples in making the case that prices and commercialisation may in fact destroy the value of the goods and services they hope to provide in his book “What money cant buy. The moral limits of markets” read my blog post about it here.
  • Finally a question for you. How might this idea impact whether the government should provide benefits in kind, such as free child care or food vouchers, or whether they should focus on cash benefits?
Read 120 times Last modified on Wednesday, 07 November 2018 17:25
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