By Sam Palmisano
December is upon us. It’s the time of year where people do most of their gift-giving. Between major religious holidays and those of us with December birthdays, millions of gifts will be exchanged over the next few weeks.
As your friendly, neighborhood economics nerd, I’m here to remind you that giving gifts is terrible for the economy and contributes to environmental waste. Unless you’re giving out cash gifts, you’re most likely part of the problem.
As usual, I brought an accompanying graph.
When Dr. Joel Waldfogel coined the term “Deadweight Loss of Christmas” in a popular 1993 academic paper, he discovered that between 10 percent and 33 percent of a gift’s value is lost in the exchange.
As opposed to a win-lose scenario where one person’s loss is another’s gain, deadweight loss is the overall loss of value without any additional value being added anywhere else.
The amount of deadweight loss due to gift-giving is dependent on how well the giver knows the recipients preferences. There are a few facets to this.
The first is that it is assumed that all individuals know themselves better than any other individual. This means that when I buy something for myself – groceries, clothes, or anything else – I am buying exactly what I want.
When I buy something, it sends a signal to the seller that I want this item and I am willing to pay the set price for it. When I don’t buy something, the signal is sent that either I do not want it or I am not willing to pay that price for it.
Aggregated, these signals give us the phenomenon of supply and demand. The spontaneous order of signals allows our economy to flourish in a series of win-win scenarios.
Deadweight loss comes into play when I decide to buy someone a gift; again, the amount of loss depends on the relevance of the gift. Let’s say I’m buying my family members gifts.
If I buy my mom a blanket with a picture of us on it – something she will definitely want – there is probably no deadweight loss. However, if I buy my brother a replica Star Wars lightsaber – something he couldn’t care less for – then almost all of the value is deadweight loss.
The deadweight loss occurs whenever the purchaser of a gift spends more on the gift than the receiver would have paid for it themselves.
If I value an item, let’s call it a jacket, at $10, I rationally would not spend $10 for that jacket. So when someone buys me the jacket for $25 and gives me the jacket, they have given me something worth $10. Simple math shows that there is $15 of deadweight loss there.
That’s why cash gifts are the most economically efficient: there cannot be deadweight loss. Since monetary currency gives us a uniform system of value, there is no value lost in the transaction.
If someone has given me $25, they have given me $25. That may sound redundant, but the reality is that we both assign the same value to $25, but we do not assign the same value to the jacket.
Deadweight loss is also indirectly detrimental to the environment since any waste of resources is viewed as an environmental downside.
There’s obvious waste associated with giving gifts that I won’t necessarily go into. That’s the use of wrapping paper, gift bags, bows, and boxes to hide gifts until they’re ready to be given.
I definitely won’t go into the use of gift cards – the most common substitute gift for cash – as a single-use waste of plastic that is almost never recycled.
What I will discuss is the overconsumption and inventory problems that indirectly waste resources.
Buying gifts that aren’t exactly what someone wanted or cost more than they would have been willing to pay is overconsumption. When you buy that item, you are sending the signal that this item is worth the given price.
The supplier receives that signal as demand for that item at that price and restocks the item. This additional inventory both overconsumes the item and leaves the supplier with additional items in stock.
Often enough, unwanted gifts are returned. The supplier then has even more items in stock. Maybe they can return the items to their supplier. Maybe they can donate the items or sell them at a reduced price.
Either way, buying that unwanted or overvalued gift has created deadweight loss. The best case scenario in returning a gift is receiving back the monetary value of said gift, but the business still loses out in the end.
All of these additional gifts that go unwanted or unused are a misallocation of resources that could have otherwise been used efficiently.
The wood pieces represent trees unnecessarily logged and the loss of our greatest natural carbon offset.
The plastic pieces represent an ongoing waste problem with non-biodegradable plastics.
The metal pieces represent the mining of ores and all of the pollution that results from it.
The cloth and fabric pieces are grown on clear-cut land that is now slightly over allocated.
All for nothing. All so we can feel good about giving gifts that are only partially wanted.
To recap, there are really only three 100 percent efficient ways to give a gift: buy it for yourself, buy the recipient exactly what they want at the exact price they value it, or give cash.
Some even love to quote the cliché “it’s the thought that counts”, but any economist can cliché “a penny for your thoughts” right back at you. Unless you attach large economic value to the thoughts, they don’t really count and they’re still part of the problem.
Also, let’s not lie to ourselves as college students; no matter what gift we receive, we almost always would have preferred the cash value that the giver spent on it.
Then, at least, we could spend it on groceries, overpriced textbooks, the Rusty’s cover, or breakfast at First Watch.
Let’s be efficient this holiday season. Ask your friends and family for cash as gifts. Give out cash as gifts. As individuals, we know best what we want for ourselves.
That being said, my birthday is this Monday. Please feel free to send cash my way.