Economic Principle: Dead Weight Loss
Christmas is wonderful. Hot chocolate, sweets, music, giving. There is an irreplaceable magic that comes with the season. Now, I hate to rain on the Christmas parade, but it is these times that my inner economist comes out.
Christmas is one of the most inefficient holidays that exists. Economically it's great for vendors and producers, but we, the consumers, are getting crushed. Dead Weight Loss is when purchase happens when it shouldn't or doesn't happen when it should. In the case of Christmas, we have the first. Gifts are purchased when they shouldn't. Now let's breathe a little before everyone thinks I am opposed to giving. This is what happens:
I love board games. Let's say I want a new board game. I am willing to pay $10 for it. It costs $15. My friend knows I want this board game. He buys it for $15 and gives it to me. I am happy. This board game makes me "$10-happy" but not "$15-happy".
Now Let's use the same situation for my friend. He likes ugly t-shirts and is willing to pay $10 for an ugly t-shirt. I buy him a $15 ugly t-shirt for Christmas. The ugly t-shirt makes him "$10-happy" but not "$15-happy".
What happened? We both spent more than the receiver would have spent or would have been happy receiving. We have lost $10 altogether of potential happiness. This is dead weight loss. If you don't quite understand this, remember the story of The Gift of the Magi (Here's a Sesame Street version: http://www.youtube.com/watch?v=o2VFgHGKzx4).
To an economist, there would be lost happiness, but I believe that this happiness actually goes to the giver of the gift.
"Only when you lift a burden, God will lift your burden. Divine paradox this! The man who staggers and falls because his burden is too great can lighten that burden by taking on the weight of another's burden. You get by giving, but your part of giving must be given first." (Spencer W. Kimball)
Perhaps the giver in this instance is "$5-happy" from giving.
Merry Christmas
Happiness is difficult to impossible to quantify (says the mathematician) but that's okay because the real number system is hardly the only one. However, economics relies on the real numbers exclusively. Or maybe I'm wrong. Are there any economic models that use different mathematical structures than the real numbers?
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