If you haven’t had a chance to go Christmas shopping don’t despair, gifts destroy value. For example, someone on a diet is unlikely to place much value on a box of chocolates. The difference between what was paid for the chocolates and what the recipient would have paid represents destroyed value. They could have been left on the shelf for someone who would have fully valued them. Economists call this deadweight loss.
In a book entitled Scroogenomics, Joel Waldfogel, estimated the total deadweight loss of Christmas in the US at $12 billion1.
In an earlier study, Waldfogel shows that the less well you know someone, the greater the waste. He contends that gifts from friends and significant others are most efficient. Gifts from members of the extended family are the least efficient and typically destroy a third of their value.
According to The Economist, Americans returned US$ 261 billion of goods last year, a figure higher than Apple’s annual turnover. The cost of returns to retailers can be as high as 10% of the goods’ value. Add to this the impact on the environment. The most returned items are clothes. According to Newsweek, clothing returns accounted for 62% of all holidays season returns in 2014.
According to the World Resources Institute, a 200 gram box of chocolates generates carbon equivalent emissions equal to driving a car between 2.7 and 7.8 kms, depending on whether rain forests were cleared to grow the cocoa.
So how can deadweight loss be avoided? One solution is ask people what they want to improve the chances of getting them something they value. Or there is the risky option of buying someone close to you something that you really want. Another is to give cash. A cash gift might be combined with donation suggestions.
1 In 2009.