I hate Christmas. It's so inefficient. This is a view I adopted years before I bothered to learn any economics, and it is gratifying to know that professional economists agree
. Tim Harford
has been offering
some helpful advice
on how to reduce the deadweight loss
. Here are a few of my own thoughts.
As a recipient, it's easy. Get over your endowment effect
. Work out how much you value each gift - i.e. the maximum amount you would be willing to pay for it. Auction each gift on eBay
, using your valuation as the reserve price. Any gifts that you don't sell are worth keeping.
If the recipient of your gifts has adopted the above strategy, then giving gifts is easy too. In this case you want to minimise your search costs
. So, walk into the nearest shop, walk up to the nearest shelf and buy the nearest item on that shelf. This procedure can easily be modified to satisfy any budget constraints you have imposed on yourself.
Otherwise, things are a bit more complicated. I think it's worth noting that the deadweight loss of gift-giving need not be as high as you think. Marginal value
declines as the quantity consumed increases. So, if you give a gift valued at £40, but costing £50, the recipient can reduce the quantity that he buys for himself until the marginal value has risen back to £50. The solution is therefore to give gifts that the recipient purchases regularly. Things like cars and washing machines are bad - it's hard to reduce your purchases if you only buy a new one every few years. Things like soap, toothpaste and bacofoil are good. ["But that's so unromantic," you protest. Tough. I'm trying to make you more efficient, not get you laid.
] Also, try not to give so much that the recipient acquires an abnormally large stockpile - there's an opportunity cost
in the lost interest you could have earned by putting the money in the bank - and try to avoid goods whose price you expect to fall before the recipient replenishes his stockpile. It might be worth avoiding perishable goods too - a week's supply of milk seems stingy; a year's supply of milk will mostly be poured down the drain.
If you are really serious about reducing the deadweight loss of Christmas, then give gifts that have been produced by a monopoly
. Without perfect price discrimination
, monopolies sell their goods at a price above marginal cost
. So, for example, Microsoft might sell a copy of Windows at, say, £150, when the marginal cost is only £10. A consumer who valued Windows at £50 would be unlikely to buy a copy, but if he did, his net loss of £100 would be more than compensated for by Microsoft's net profit of £140. In the interests of economic efficiency
, this is obviously a purchase that should be made. If your recipient shares your goal of eliminating deadweight losses wherever he finds them, then this opportunity may not be available, otherwise, it's the perfect answer to your Christmas shopping problems.
So, what would make the best Christmas present? I would like to suggest diamonds. They are, or at least have been historically, produced by a monopoly, de Beers
, and are not as unromantic as bacofoil or Microsoft Windows. Having said that, it is worth bearing in mind that wherever you have a monopoly, you will have monopoly rents
, and therefore rent-seeking
. Thus, the costs of rent-seeking need to be accounted for when making your calculation. I have no idea how much that would be, but in some cases it might be all of the monopoly's profit. In the case of diamonds, it is alleged that much of the rent-seeking takes the form of some rather unpleasant African civil wars
, in which the warring parties are fighting for control of the government and perhaps the right to tax de Beers's profits or sell the diamonds on to de Beers. But, if you can live with the possible marginal intensification of a civil war in Sierra Leone
on your conscience, then give diamonds this Christmas.