When people think of Christmas, economic theory rarely comes to mind. But it should be no surprise that Christmas, as always, will come with economic phenomena, since shoppers are estimated (conservatively) to spend $65 billion this holiday season.
One man who considers the economics of Christmas in great detail is Professor Joel Waldfogel of The Wharton School. Waldfogel asserts that much of Christmas giving results in a deadweight loss, an economic term defined by Investopedia as
The costs to society created by an inefficiency in the market. Mainly used in economics, the term “deadweight loss” can be applied to any deficiency due to an inefficient allocation of resources.
An example of deadweight loss is the economic impact of sales taxes. Assume a car is being sold. Tom is selling his car to Jerry. They have agreed upon $10,000 as the price of the car. Without sales taxes, Tom receives $10,000 (which he clearly values more than the car) and Jerry receives the car (which he obviously values more than his $10,000). Both Tom and Jerry are now better off because of this transaction. Now, let us introduce a 10% sales tax and assume that Tom and Jerry split the cost of the tax – resulting in a $500 expense for each of them. Jerry now receives the car, but at a total cost of $10,500; and the amount (net of taxes) Tom receives is only $9,500. Where does the $1,000 go? Surely some of this tax revenue is used for services that Tom and Jerry will benefit from (roads, police protection, etc.), but much of it will be wasted in transaction costs and acts of economic sodomy (i.e. stimulus projects). Whatever portion of the $1,000 that is wasted is known as a deadweight loss. It is, typically, third parties (such as government) that create deadweight loss. Though this is a very simple example, the illustrated principles apply to the most complex transactions.
According to Professor Waldfogel, however, Government is joined in its crime by over-anxious (albeit well-intentioned) gift-givers. Let us now assume that Tom and Jerry, because of the friendly relationship they formed over the sale of Tom’s car, both feel obligated – but not inspired – to give each other a Christmas gift. Tom and Jerry (separately) each budget $75 to spend on each other. If they were each to spend their own $75 on themselves, they would receive at least $75 in value for their spending. But, knowing little about each other, the gifts bought for $75 will have only $60 in value to their recipients. This missing $30 is a deadweight loss. Granted, unlike the deadweight loss created by a sales tax, the loss created by Christmas will at least go to the shareholders of the gift-producing corporations. So Christmas is not nearly as guilty of crimes against efficiency as Government. Nevertheless, Tom and Jerry have still suffered a 20% deadweight loss as a result of Christmas giving. The 20% figure is based on Waldfogel’s research wherein he asked participants to value things they bought themselves and things given to them by others – the difference was approximately 20%.
What does Professor Waldfogel suggest? Cash, gift cards, and charitable giving on behalf of your gift recipients are all excellent alternatives to arbitrary and inefficient gifts. Of course, gifts usually come with a high sentimental value and there is certainly nothing harmful about gift-giving in general. But, hopefully, Waldfogel’s research will encourage all of us to give the gift of efficiency along with those obnoxious sweaters this holiday season.