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Holiday Dilemmas

Dec 11, 2011 • Behavioral Economics, Demand, Supply, and Markets, Households, Thinking Economically • 200 Views    No Comments

Can doing good be bad?

  1. At food banks, the holiday season brings an avalanche of food from donors when the charity could purchase the food more cheaply and use volunteer time more wisely. As a result, charitable food donations misallocate resources.
  2. According to research from economist Joel Waldfogel, we tend to undervalue the price of a gift we dislike while giving much greater value to what we buy for ourselves. As a result, gift giving destroys value.

However, this Economist article suggests remembering that 1) a gift we dislike may be good for us, 2) a gift can be an extravagance we otherwise would not purchase, and, perhaps most importantly, 3) the process of giving adds intangible value to the gift.

The Economic Lesson

Wasted giving could be called “deadweight loss.” Described by Freakonomics, it represents the difference between the cost of an item and how much the recipient values it. So, if you are a Yankee fan and someone gives you a Boston Red Sox hat, the deadweight loss would be 100% of the price. The amount by which pleasure falls is the deadweight loss.

But, is the deadweight loss of gift giving to friends and charities offset by its intangible benefits?

An Economic Question: How might you estimate the deadweight loss of gifts you have received?

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