Jonah Burke

In the December 25, 2006 issue of The New Yorker, James Surowiecki writes about what he calls “the deadweight loss of Christmas.” When you give a gift, he explains, the difference between the price you paid and the price the recipient would have paid constitutes “deadweight loss” or, put more simply, a waste of money. Surowiecki concludes that due to this discrepancy, “billions of dollars a year is now going to waste.”

Surowiecki’s argument is flawed in multiple ways.

First, Surowiecki ignores the value the giver of the gift receives. If spend ten omicrons on a gift for which you would have spent only five, but I derive five omicrons of joy from giving you the gift, certainly I have wasted no money.

Second, and most troubling, Surowiecki fails to recognize that price does not equal value. He writes, “A deadweight loss is created when you spend eighty dollars to give me a sweater that I would spend only sixty-five dollars to buy myself.” No. If you are rich and I am poor, you place less value on eighty dollars than I place on sixty-five. Although I would have paid less for the sweater than you, I derive more benefit than the cost you incurred. This fact results from the declining marginal utility of wealth, a tenet of economics that states that as you accumulate wealth, you derive less value from each additional dollar.

Finally, Surowiecki’s use of the term deadweight loss is nonstandard and, to me at least, confusing. Usually, deadweight loss refers to the decrease in value inflicted on a market by an outside force such as a government-enforced tax or price cap. (More on Wikipedia.) In contrast, Surowiecki’s version of deadweight loss is intrinsic to the market.