There are good reasons that economics is called “the dismal science.”
“The Deadweight Loss of Christmas” (Google reference for .pdf) is surely a case in point. In that scholarly analysis, a Yale economics professor takes the time and effort to quantify the economic inefficiency of Christmas gift-giving.
The idea is simple. If you buy something for yourself, you know exactly what you want. By contrast, if somebody buys you a gift, they have to guess what you’d like. And to the extent that they guess wrong — by a little or a lot — the value of the gift, to you, may be well be below the purchase price. And that gap between what the gift-giver paid, and what the gift-recipient would have been willing to pay — that’s the deadweight loss of Christmas.
Economists have a simple (if entirely soulless) solution: just give money. The gift recipient can then buy themselves exactly what they want, and the total satisfaction or “utility” of the transaction is maximized. A gift of money eliminates the deadweight loss involved in trying to guess somebody else’s preferences.
A different deadweight loss
Which brings me to my newly-acquired, soon-to-be-cancelled Best Buy credit card.
I made a major electronics purchase a few weeks back. The sales clerk at Best Buy talked me into getting a Best Buy credit card. Normally, I say no to all such offers. But the deal was that this would give me an instant 10% off the not-inconsiderable sales price.
Cash back, right? Who would turn that down.
Only, this credit card doesn’t work like that. What I actually got was, in effect, store credit. I got “rewards” equal to 10% of the value of the purchase. Rewards that could only be redeemed in Best Buy merchandise. Worse, that’s how the card works for all purchases made on it. There is no “cash back” feature. All rebates are in the form of additional “rewards” that can be cashed in for Best Buy merchandise.
I guess this is a fairly good deal, if you have an ongoing need for the stuff Best Buy sells. But I don’t. Worse, I’m on a tear to get rid of stuff, the process of Döstädning, or Swedish death cleaning (Post #1667). The last thing I need is yet another electronic doo-dad or small appliance.
And so, what ensued was not unlike the deadweight loss of Christmas. I wasn’t given specific gifts, for sure. But in order to get my money’s worth, in effect, I had to choose my gifts out of a catalog of stuff that I didn’t really need or want.
For something that was free*, it was a surprisingly grueling process.
* As a responsible parent, and an economist, whenever my children used the f-word (free) around me, I would immediately snap “pre-paid”. So I use the term loosely here. The plain fact is that the cost of all such givebacks has to be worked into the original purchase prices, so that Best Buy can remain in business. So these “rewards” aren’t free, they are merely pre-paid.
At my wife’s suggestion, I went for batteries, because those are consumables, and we’ll eventually use them up. Once I got past about $50 worth of alkaline batteries, I was stumped. But, gosh darn it, I was not going to leave money on the table. So I spent hours swapping stuff into and out of my on-line shopping cart, in an attempt to get things I might use, whose prices summed to just over the total “rewards” I had been granted.
I recall buying a flashlight. And a pocket knife (a.k.a, future contribution to the TSA). Because you can always use another one of those. The rest of it is a blur.
I hope I’ll be pleasantly surprised when the packages show up. Or at least recall that I ordered it.
In any case, once I’d finally made my purchases, and burned up those rewards, I had the funny feeling that I had come across this process before. But it took me another day to realize that what I was experiencing was the deadweight loss of Christmas.
In effect, I gave myself some gifts that I didn’t much want.
For sure, if there had been a straight-up cash-back option, I’d have taken it. In fact, in hindsight, if they’d offered me half that dollar amount, as cash back, I’d have taken it.
Thus validating the fundamental insight of The Deadweight Loss of Christmas.
