Let me start by getting something off my chest. I hate Christmas! After years of receiving unwanted presents, Christmas has always been a source of disappointment. Now, after studying economics my disdain for this event has grown. This is because I have now realised that Christmas is inefficient. No other word is as painful in economics.
So how inefficient is Christmas? A study by Joel Waldfogel in his 1993 paper “The Deadweight Loss of Christmas” has revealed that “between one tenth and a third of the value of holiday gifts is destroyed by gift giving”. Given that the Australian Retailers Association is predicting “national sales of $45 billion in the six weeks before December 25”, this Christmas spending will result in a deadweight loss of billions to the Australian economy.
In a perfectly efficient market, consumers make the best decision regarding their own consumption and saving. However, at Christmas people award gifts to each other and, in effect, individuals do not have a choice about the gift that they will receive. This means that, unless you are given something that you would have bought anyway, you will receive a suboptimal outcome. An example of this occurred when I received a $30 book a couple of years ago. Whilst I was happy with this present, I would not have spent anything more than $20 for it. This means that there was a deadweight loss of $10 from this present.
So what is the solution to this problem? The simple exchange of money at Christmas. This allows consumers to adapt their budget constraint to their net exchange of money. As a result, individuals have the opportunity to maximise their utility by choosing the best consumption bundle available. Another solution involves signalling what presents you would like in a Christmas Wish List as this mitigates the information asymmetry between the giver and recipient. Yet another way to minimise inefficiency is through the giving of gift cards. This has become a popular trend in recent years as it allows people to choose gifts that they desire whilst the practice maintains the sentimentality of giving a gift. However, this is still inefficient as the recipient’s choice is restricted to the gift card merchant.
The obvious exception is Santa. As the benevolent ruler of the North Pole, he distributes his wealth in the form of foreign aid to children around the globe. This generous act maximises children’s utility around the globe.
So therefore, unless you are receiving gifts from Santa, I hope you will be sharing my dislike for Christmas as an economist can never justify a deadweight loss.