The Hindu Business Line : <I>Deadweight loss of X'mas </I>

December is the best and worst of months; best because you get a lot of gifts for Christmas and New Year and worst because there is a big hole in your bank account, as you run up huge credit card bills buying gifts for others! Of course, the economy does well going into the New Year, as buying gifts boosts the Gross Domestic Product. Economists, however, consider gifts a wasteful expenditure. Why?

A central concept in economics is utility. It is the measure of satisfaction you get from consuming goods and services. Economists have found that the utility you derive from a product that you buy is always higher than from a product that you receive as a gift.

Joel Waldfogel, a professor at the Wharton School has found that a dollar you spend on yourself is likely to create 20 per cent more satisfaction than a dollar that somebody else spends on you.

Suppose your mother-in-law gifts you an article worth Rs 5,000, it is likely that you would not value it for more than Rs 4,000. Why?

Quite aside from the relationship that you may have with your mother-in-law, the fact is that only you know what you want. It is difficult even for those close to you to second-guess your desire. The gift, therefore, has far less value to you than what your mother-in-law paid for it. Professor Waldfogel calls this the "deadweight loss of Christmas."

So, how do you avoid such wasteful expenditure? Buy gift certificates instead of gift articles. You may cringe at the idea but research has found that receivers value gift certificates at the price the givers paid for them!

(The author is based in Toronto, Canada)

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