Dec 16 2010

Grinchonomics – or “how the Economist stole Christmas”

Published by at 6:38 am under Efficiency,Externalities,Humor,Market failure

Every year around this time economics students and teachers alike begin looking forward to the long Christmas holiday right around the corner. Two or three weeks of yuletide cheer, mistletoe, snow men, caroling, food, family and… dead weight loss. That’s right, what’d you think this post would be about, the efficiency of Christmas? Come on… it’s the DISMAL science! Not the jolly science!

The tradition of giving Christmas presents has long fallen under the scope of economic researchers who seek to understand more about the rational, or as it turns out, irrational behavior of individuals in society. From an economic standpoint, many of the things that Christmas traditionalists believe are bad, are actually good, while the traditions many believe are good are in fact quite bad from an economist’s viewpoint. Basically, economists are grinches. So prepare to be grinchified…

Are you the kind of person who thinks doing all your Christmas shopping online is cold, impersonal, and against the holiday spirit? Well, Stephen Dubner, co-author of Freakonomics, argues that shopping online is far more efficient than spending days roaming the malls and shopping centers searching for the right gift for your loved ones. Says Dubner about “clicking and gifting” (i.e. shopping online):

See here’s the thing: I like the sound of clicking and gifting, that sounds efficient to me. That’s what we need to bring to the holidays, is more efficiency, less emotion. Let’s get rid of that.

Economists’ disdain for Christmas shopping is not limited to criticizing the inefficiency of spending hours shopping for gifts, in fact the tradition of giving gifts itself is considered economically irrational and inefficient. Sure, you say, it’s the thought that counts. Well, that’s just stupid. A gift giver can think all he wants about what a friend or a loved one may want for Christmas, and end up buying the thing they think the other person wants. But when it comes down to it, each of us only really knows what one person in this world wants, and that is ourselves, that’s right, the royal ME.

So basically, any gift you can buy for someone else will bring them less benefit than a purchase they themselves make; so WHY BOTHER? What it comes down to is self-interest in the end. When we buy a gift for another person, it is ultimately for our own benefit, which as we will see soon, most often exceeds the benefit of the receiver of the gift.

This is what’s known as the dead weight loss of Christmas. From an economic standpoint, Christmas is not “the most wonderful time of the year”, rather it’s “the most inefficient time of the year” (not so catchy as a song lyric, I’m afraid). Dead weight loss is like when,

…my wife’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it… so that’s $83.50 deadweight loss… And the holidays are jam-packed with that kind of waste.

We’ve all been there, as both the gift giver and the unfortunate receiver of a gift we don’t like or even want. In fact, this phenomenon can be graphed using a basic diagram learned by all high school economic students: the marginal benefit, marginal cost diagram. Look at the graph below and see if you can figure out what it shows, then scroll down and read the explanation.

Basically, what the graph above shows is that the act of giving gifts brings benefits to the gift giver that are not enjoyed by the gift’s receiver. From the ultimate consumer’s standpoint (i.e. from the perspective of the gift receivers), many of the gifts received for Christmas will be valued far less than the amount of money, time and energy that went into choosing and buying them by the gift giver.

In other words, the marginal cost of shopping for and buying Christmas presents exceeds the marginal benefit of those who receive them, hence, the market for Christmas gifts fails since the behavior of private individuals results in a level of Christmas shopping that exceeds the socially optimal efficient level, at which the marginal benefit of the give receivers intersects the marginal cost of gift production. Resources are over-allocated towards Christmas present shopping because it is simply impossible for gift givers to know the precise preferences of those for whom they shop.

That $85 sweater, for instance, may have only been “worth” $1.50 to the poor fellow who received it. The dead weight loss, therefore, is the resources that went towards producing and purchasing a sweater for someone who doesn’t even like it, and all the other possible ways those resources and that money could have been allocated.

Have I ruined your Christmas yet? Well, fear not, there is an economically efficient way to approach the Christmas season and to maintain the beloved tradition of gift giving! That’s right, even the Grinch economists have a solution to this wasteful problem! And it is so simple… it is… CASH! Cash is the ultimate gift, perfect in every way. No time whatsoever is wasted in the process of deciding what to give someone. Simply put your debit card in the ATM machine and your entire season of shopping is done!

Cash is the perfect gift to receive too. There is no chance you will be unsatisfied with what you ultimately “get” for Christmas.  Cash can be spent on the goods from which the receiver himself enjoys the greatest marginal utility per dollar he spends. The dead weight loss above is completely eliminated when cash is given instead of other presents. The marginal benefit of the giver and the marginal benefit of the receiver are the same since the giver can rest assured that the receiver will spend it on something that provides him with the greatest possible benefit.

So there is a happy ending to this story after all! Maybe someday when economic education has truly succeeded we can once and for all do away with the wastefulness and inefficiency of Christmases past and form new traditions rooted in the efficiency of cash gifts. So, students of economics, if you want to make your loved ones happy this Christmas, you now know what to do. In the process, you’ll help make the world just a little bit more efficient!

For more on the dead weight loss of Christmas, listen to and discuss with your class the two podcasts below, from two of my favorite shows, American Public Media’s Marketplace (from which the quotes above are taken) and NPR’s Planet Money.

Discussion Questions:

  1. A market failure in economics exists whenever resources are allocated inefficiently towards the production or the consumption of a certain good. What makes holiday gift giving a market failure?
  2. Why is the marginal benefit of a gift giver often times greater than the marginal benefit of a give receiver? How does this discrepancy result in “negative social benefits” as indicated on the graph?
  3. What is dead weight loss and how does holiday gift giving result in it?
  4. Why are cash gifts more “efficient” than buying presents for others? How would an economist analyze the efficiency of gift cards or gift certificates compared to presents? To cash?
  5. Should we scrap Christmas and replace it with Economistmas? For Economistmas, everyone would get exactly what they want, which is to say, everyone would get money to BUY exactly what everyone wants. Surely you agree this would be far superior to our antiquated traditions rooted in inefficiency and dead weight loss, right?

Author’s note: For the record, I have bought my wife and family the perfect gifts this year! They’re simply going to love what I got them! And no, it is not cash! ;o) Merry Christmas!!

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

20 responses so far

20 Responses to “Grinchonomics – or “how the Economist stole Christmas””

  1. Ignacio Don 22 Dec 2010 at 6:32 pm

    I agree completely that Christmas shoppers spend days around shops looking for presents that will make their friends and family happy and that it is highly inefficient. However reaplacing Christmas gift with checks, gift, cards and envelopes full of cash hardly seems like a Christmas that would be suitable for everyone. Furthermore if everyone got money for Christmas a lot of that money would be saved up by many people especially in these financial times so the amount money that is allocated now towards buying gifts would decrease at the fact that people will put the money in their bank accounts.

  2. Marissa Gardon 04 Jan 2011 at 10:05 am

    2. The marginal benefit of a gift giver is often greater than the marginal benefit of the gift receiver because the giver places more value in the gift than the receiver does. Often the receiver of a gift does not think their gift was actually worth what it cost. This can result in negative social benefits because the reciever may feel jipped, while the giver feels great about the gift they gave. This may cause some tension..

    3. Deadweight loss is a loss of economic efficiency. Holiday gift giving can result in this because it can throw off the equlibrium in the market.

    4. Cash gifts are more efficient because the marginal benefit is the same for the giver and the receiver. I believe an economist would view gift cards as a step better than a gift, but a step less than cash. It may end up that the gift card the giver gets for the receiver is to a store they don't really like, and this will yet again lead to a difference in marginal benefit. So, gift cards can go either way.

  3. Lucyon 04 Jan 2011 at 11:03 am

    1.Gift giving is a market failure because the marginal cost of gifts is higher than the marginal benefit. This means that resources are inefficiently allocated, which is the definition of a market failure.

    3. Dead weight loss occurs when the people buying a product have less use for it than the cost and so people who would have enough use for the product to make it worth the cost can't buy it. It is a completely inefficient allocation of goods. Gift-giving results in dead weight loss because receivers of gifts end up with things that are worth less to them than their price.

    4. Cash gifts are more efficient because they do not necessarily result in dead weight loss. With cash, the gift receiver can buy products that will be worth more than the cost to them. This is economically efficient.

  4. emmapon 04 Jan 2011 at 11:23 am

    1. Holiday gift giving is a market failure because the gift giver can never be 100% certain that the receiver would enjoy receiving the gift. Also, the time spent finding the gifts takes the gift giver away from much more productive things they could be doing.

    2.The gift giver will almost always feel good about giving the gift because our society is very good at lying and being polite, but the receiver has a good chance of being dissatisfied. As the gift travels aroiund during the season, it loses it's social benefits.

    3.Dead weight loss is the difference in value between what the gift giver spends on the gift and what the receiver thinks of the gift. Gift giving results in dead weight loss because, as I said before, the giver can never be 100% certain of what the receiver wants.

    4.Cash gifts are more efficient because the giver spends no time shopping around for 'the perfect gift,' which they won't end up giving because the receiver will be dissatified, and the receiver gets what they want the first time around with no dissappointment beforehand. Gift cards/certificates are much more efficient than presents, and have almost the same effect as giving cash so far as increasing efficiency goes. However, comparing gift cards/certificates to cash is much trickier. To the gift giver the gift card is more satifying because they appear to have put a little more effort in rather than 'taking the easy way out' and they will feel better about having an idea of what the receiver might get. The receiver could go either way with their opinions on efficiency though. There is a small chance that the gift card could be for someplace they do not like, but they could like the effort the person went to over just giving cash. Cash is more usable anyway. Cash is the most efficient gift.

    5.In some ways yes, but the material gifts are easy enough to exchange that on the receiver's side it does not matter much, and the gift giver can choose which way they want to go anyway. Plus, traditions are just fun.

  5. Jackie L.on 04 Jan 2011 at 1:26 pm

    First of all, I'd just like to say I really enjoyed this post; not only did it help me understand dead weight losses better (I don't believe we spent a lot of time on that in class), but it was entertaining!

    1) When people receive gifts that they don't like, won't ever use, or will simply throw away, it is most definitely a market failure. The time, money, and labor spent producing that product was a complete waste, along with the time and money the gift giver spent on that gift.

    2) A gift giver often receives a bigger benefit for buying someone a gift than that person will by receiving it. If the receiver doesn't like the gift, they get absolutely nothing by receiving it. The gift giver, however, has spent money on the receiver, and that receiver will feel indebted to the giver, even if they hate the gift. This causes people to go around giving gifts, trying to benefit other people, when it really doesn't.

    3) Dead weight loss is the difference between what the product actually costs, and how much the receiver truly thinks it is worth. So if a receiver values the gift lower than the giver bought it for, that difference is the dead weight loss.

    4) Cash is more efficient than presents because, obviously, the receiver can buy anything they want. It's guaranteed to be appreciated, at least in the application part. The receiver may not appreciate the thought of it, thinking that the receiver didn't care enough to look for a gift, but truly, everyone appreciates cash. Gift cards are quite similar. When compared to a real present, they are more efficient because the receiver still has the option to buy what they want, and still feel like the giver put thought into it. It is much trickier to compare it to cash though. There is the small chance that the gift card wouldn't be at a store they like, but apart from that, the only difference is that you are limited to one store.

    5) No, we should not just start giving cash! First of all, everything will basically even out anyways, eliminating the need for presents at all, and people will only buy things for themselves. Not only that, but most people wouldn't appreciate 7 different gifts of just cash. There is deep-rooted tradition in giving gifts, and losing the chance to open up Grandma's gift to see which horrendous sweater she bought you this year isn't fun at all.

  6. Rachel Lawrenceon 04 Jan 2011 at 1:54 pm

    Finally! Someone who is as Grinchy as I am! Although I wasn't completely aware I was a Grinch, I know now. All I got for Christmas was money and chocolate–how can you go wrong with that?? However, I digress.

    1. Gift giving, especially when it's completely up in the air as to whether or not the person will actually like it, is a complete waste of market resources. Maybe that was the last $85 sweater available–now the efforts and resources have completely gone to waste, and it's probably going to Goodwill to be bought for $5 max. Merry Christmas to you? I think not.

    2. Often times I've found that the gift giver is under the impression that they're giving a marvelous gift! This is unfortunately not the case in most scenarios. And when the gift isn't received with the unabashed enthusiasm that the giver had expected, they tend to get mad at the recipient, so it lowers their social views of one another.

    4. Cash is undoubtedly more efficient than gifts in almost all cases. With cash, you can literally use it to buy anything (if you have enough of it). This way, no one loses out–cash it totally used for it's value in both ways. Gift cards and certificates are still more efficient than presents, but they're far more limiting than cold, hard money in your hands.

    5. Although I'm all for scrapping the gift-giving-and-receiving parts of Christmas (except for special cases–I'm broke, so I make gifts for people), I do have to stick up for the idea that Christmas is NOT about presents. I firmly believe in a theological basis for Christmas, so while I endorse "No more presents–give us money!" , I cannot say that replacing Christmas with Economistmas rates at all on my "Good Ideas Chart".

  7. Alexon 04 Jan 2011 at 3:27 pm

    1.) Holiday gifts are market failures because resources are distributed inefficiently towards many people’s consumption of these disliked goods.

    2.) The benefit of the receiver is much less than what the giver assumes it will be; therefore, this causing social awkwardness in the gift opening as well as unhappiness in the gift process.

    3.) Dead weight loss is pretty much the money wasted on an item. If something is priced more than one thinks it’s worth, the money spent on this unworthy item-the receiver’s worth amount=dead weight loss. WASTED MONEY!

    4.) Cash is never disliked because it can be spent on ANYTHING the receiver wants. Gift cards are more efficient than present, but less efficient than money. Gift cards are great…if the receiver likes the store/restaurant the gift card belongs to. Money can be used anywhere making it universal instead of specific to a place.

    5.) NO!!! I love the stupid presents on Christmas. They might not be used as much as the things I buy myself, but to me it really is the thought that counts. And I would rather my little brother make me his handwritten card than five dollars any day because it shows the effort and care he has for me! (I know I’m cheesy!) Giving cash takes the excitement out of opening presents and whatnot!

  8. Samantha R.on 04 Jan 2011 at 3:59 pm

    1. Giving gifts for the holidays causes market failure because it leads to dead weight losses. The dead weight losses are the resources that went toward producing and purchasing a gift for someone who doesn’t even like it, and all the other possible ways those resources and that money could have been allocated. Market failures occur whenever resources are allocated inefficiently.

    2. Negative social balances occur because gift givers are overly satisfied with the time and money they used to buy a good gift, while gift receivers do not realize or fully appreciate the amount of resources that were spent on the gift.

    3. Dead weight loss occurs when a gift receiver does not use a gift or does not appreciate a gift for what it was worth to produce it. Dead weight losses account for all of the resources that were used to produce an unwanted gift, and all of the other possible ways that those resources could've been used.

    4. Cash is an efficient gift because it is guaranteed that it will be a liked and used gift, and the gift receiver will be able to appreciate exactly how much the gift giver spent. Therefore, there are not negative social balances or dead weight losses. Compared to other gifts, I would think economists would deem gift cards more efficient (a gift card has to be more efficient than an $80 ugly sweater, right?). However, cash is definitely the most efficient gift choice.

    5. Definitely not! Christmas is not about efficiency; giving everyone a wad of cash instead of a thoughtful gift would ruin the spirit of Christmas! Also, the best situation would be to buy people gifts that they would never have thought of getting for themselves but end up really loving! That brings great satisfaction to both the giver and receiver and is way better than any boring old item the receiver would've picked out if given a $20 bill. Plus, there are always gift receipts!

  9. Sydney Durhamon 22 Jan 2011 at 4:06 am

    (2) The marginal benefit of the giver is often greater than the marginal benefits of the gift receiver because the giver values the present more than the receiver who may not have even wanted the gift in the first place. On the graph, the negative societal benefits can be found in the shaded green area labeled dead weight loss, or wasted money.

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