The Logic of Maximizing Behavior and Maximizing in the Marketplace

Read these sections revisit the concept of marginal costs and benefits within the context of the consumer's (and the firm's) maximizing behavior. The later pages in this section define two new concepts: consumer surplus and producer surplus. Take a moment to read through the stated learning outcomes, which should be your goals as you read through the chapter. Attempt the "Try It" problem for each section.

Maximizing in the Marketplace

Case in Point: Bah Humbug!

Professor Joel Waldfogel, in his book Scroogenomics, derides Christmas gift giving as only an economist would. Based on repeated surveys from students in his classes (which asked them to compare value and price of gifts they received and of items they bought for themselves) and estimates of annual Christmas spending in the United States of $66 billion in 2007, he concludes that $12 billion, roughly 18% of the total, constituted deadweight loss. And that doesn't count the 2.8 billion hours collectively spent shopping for the stuff.

The crux of his argument is that when you buy something for yourself, the price you pay is at least equal to the value of the satisfaction you get from the item. For some items, the consumer surplus (the difference between the value to you of the item and the price you pay), may be small or even zero, but for other items it may be large. One example he gives where consumer surplus may be huge is the purchase of a $20 antibiotic for your child with an ear infection who has been screaming all night. But what are the chances that consumer surplus will be positive for an item you receive as a gift? "Relative to how much satisfaction their [gift givers] expenditures could have given us, their choices destroy value. Take that, Santa," writes Professor Waldfogel.

Doesn't sentimental value make up for the differences between the price of an item you receive, say a $50 sweater, and the value you attach to it, say $25? If you attach $50 in sentimental value to the sweater, then it is really worth $75 to you, which is more than the $50 price paid by the gift giver. The problem with this line of argument is that if the gift giver had chosen a sweater for you that you actually liked - one that you valued at least at the purchase price of $50 - its total value to you would then have been $100. Compared to giving you a sweater you actually liked, giving you the one you did not much care for destroyed value.

The surveys have also questioned the relationship of the gift giver to the gift recipient to see if giver knowledge of the recipient leads to more gift giving efficiency. The results are as one might expect. Gifts from aunts, uncles, and grandparents generated between 75 and 80 cents of satisfaction per dollar spent. Friends generated 91 cents, parents 97 cents, siblings 99 cents, and significant others 102 cents of satisfaction per dollar spent. In general, frequency of contact between giver and receiver increases the yield of a gift.

While acknowledging that there are some situations in which gifts may create value for recipients beyond what they could have purchased for themselves, such as when a recipient receives a CD of a band he or she was unfamiliar with but turns out to love, overall Waldfogel's estimates reveal a great loss for society. What to do about it? Giving cash would work but there seems to be a stigma associated with doing so, especially for certain kinds of relationships between givers and receivers. Gift registries solve the problem for newlyweds and could do so for Christmas gifts if that idea caught on. Since outside of your immediate circle you are unlikely to select a gift that does not destroy value, he suggests giving cash, if that is not too uncomfortable, or gift cards, possibly ones for charitable causes. Of course, people often forget to use their gift cards. When that happens, the benefit is not lost but rather goes to the retailer, which was not likely the intention of the gift giver. He thus suggests that retailers team up with charities so that any amount not redeemed after a certain time period goes to a charity stated on the gift card.

Parodying Karl Marx's Communist Manifesto, he concludes, "A specter has been haunting the rich economies of the West, and that specter is wasteful gift giving. Gift givers of the world unite. You have nothing to lose but deadweight loss and a world of satisfaction to gain".