Monday, December 19, 2005
Gifts: good or bad?
Economists always knock the idea of giving gifts. The argument goes like this: If I give you a $20 pair of socks, they may be nice socks, and you may be happy to have them, but you’re not as happy to have them as you would have been to have $20, which you would have spent in some other way. Thus, purchasing a gift destroys wealth – at least if the gift is a nice pair of socks.
However, the same language and logic can provide an argument in favor of gift-giving, in certain circumstances. If I could find an object G such that the utility I predict you will receive from G is greater than the utility of anything you would have spent the money on yourself, then my giving G to you for the holidays is in fact efficient.
How often do circumstances favorable to gift-giving come about?
(If I’m right that you’ll like G more than anything else, then it would be equally efficient for me to simply convince you of that fact, leading you to spend your own money on G. I would have performed a valuable service, by delivering information that permits you to attain greater utility.)