Economics of Unwanted Gifts: Deadweight Loss, Perceived Value

Christmas and Birthdays are the two times of year in Westernised countries when people give and receive a lot of presents

It’s a little-known fact that the first economic rationalist was Ebenezer Scrooge. That’s because economists simply can’t understand why people would do something as stupid as giving presents at Christmas.

Conventional economics teaches that gift giving is irrational. The satisfaction or “utility” a person derives from consumption is determined by their personal preferences. But no one understands your preferences as well as you doRoss Gittins

Is Cash The Best Gift? – In Theory Yes but It May Offend Some People

Gift Box
“Gift Box” credit: lemon_drop

The deadweight loss of gift-giving is the loss of efficiency that occurs when the value of the gift to the recipient is less than the cost of the gift to the giver. In this case, economists argue that cash would be a more efficient gift.

The popular comedy series Seinfeld was a “show about nothing” in particular and because of this it excelled at portraying common social situations such as gift giving.

Jerry gives Elaine cash for her birthday, thinking she can spend it on whatever she likes best. But Elaine is mortified; she wanted a thoughtful gift that signaled Jerry had put great thought into his gift. Kramer enters and does just that, gives Elaine a thoughtful gift (which ironically cost a lot less than the cash Jerry gave her).

Scroogenomics

The best known book about this topic is called Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays by American economist Joel Waldfogel.

Waldfogel says that as an institution that is supposed to match people with the stuff they want, Christmas is a total loser. In fact, when you crunch the numbers, the end of year holiday results in billions of dollars in value destruction every year. How’s that for a bottom line?

He looks at decades of retail spending data to make the case that buying gifts destroys wealth and happiness – and in many cases it would be better to not buy presents for the holidays at all because the psychological effect of receiving a gift that you really dislike is worse than not getting a gift at all!

So put down that credit card and think before you use money you don’t have to buy things that recipients don’t really want. Scroogenomics will point you to solutions that can help stop wasteful gift spending and make holiday giving a force for good. Happy and efficient holidays!

Trade Can Help You Make The Best of Poor Gifts

Gift-giving makes economists crazy. It’s so inefficient!

NPR’s Planet Money radio show tried to figure out how make the holiday season both more efficient and more joyful by conducting a wildly unscientific experiment.

They went to a seventh-grade classroom at a local school and gave the kids some small gifts candy (lollies), raisins, fig newtons etc. Then they asked them how much they value what they got and if they could think of a way to make everyone better off, without buying any more gifts. They quickly arrive at a solution trade. where the value each child felt their gift had afterwards was 30% higher. Behold, the power of economics!

Listen to the show below, the key segment starts 2 minutes in.

I asked Ebay Australia for a comment on the issue and this is how they responded:

Despite more shoppers than ever heading online for Christmas bargains this year, Australians are now pondering what to do with the 19 million gifts that didn’t hit the mark, costing us more than half a billion dollars.

This year, over half the nation (54%) received at least one unwanted gift worth nearly $73 and nearly one million of us are expected to sell these unwanted gifts online after Christmas Day, according to new eBay research.

Jenny Thomas, eBay spokesperson says that the 19 million unused presents nationwide need not go to waste. “More Australians shopped online than ever before this year in the hunt for Christmas bargains. Despite this, there are always the inevitable duplicate presents, wrong sizes or just bad present choices! For those unlucky individuals, there is a great opportunity to sell on unwanted presents and make some extra cash to cover bills, or to buy something you really want.”

Of course you’d expect Ebay to say that, their whole purpose is to be a marketplace that joins people who have stuff they don’t need with people who want the same items.

The problem I have with selling unwanted gifts on Ebay is that most of the time after fees and charges and a discounted price since you dont have a receipt you’re likely to get less money for selling the gift than the person who gave it to you paid for it – which is really wasteful.

In an ideal world you wouldn’t need Ebay because your friends, family and workmates would accurately guess what you want/need or if they have no clue ask you directly or just give you cash.

6 thoughts on “Economics of Unwanted Gifts: Deadweight Loss, Perceived Value”

  1. The trick to successful gift giving is all about need. Examples of gifts I gave/received this year are: mobile phone credit, cutlery, Tupperware, food items, hats, notebooks, pens, handbags. My best friend says it’s about fulfilling needs that people won’t do themselves. One Year she gave me rubbish bins, knowing I needed them but wouldn’t buy them for myself.

  2. Presenting gifts is a way of showing your love and affection. People consider this as one way of expressing their love.

  3. I hate to say it, but I have Re-Gifted many unwanted presents over the years. This has to be done carefully, or the loss of friends is possible!

  4. This Christmas I bought everyone an American silver eagle 1 ounce coin. It really took all the stress out of gift giving. They also got a card with some information about why people should own silver and the how our currency is being devalued by the banksters. They also each received a genuine 100 trillion dollar Zimbabwe reserve note (worthless) as a reminder that paper is never real money!

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