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Wednesday, December 21, 2011

Moneybox: Do Not Buy Dad a Tie

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Moneybox
Do Not Buy Dad a Tie
The economist's guide to giving Christmas presents that people actually want.
By Matthew Yglesias
Posted Tuesday, Dec 20, 2011, at 07:19 PM ET

Christmas is not the most wonderful time of the year for economists. The holiday spirit is puzzlingly difficult to model: It plays havoc with the notion of rational utility-maximization. There's so much waste! Price-insensitive travelers pack airports beyond capacity on Dec. 24 only to leave planes empty on Christmas Day. Even worse are the gifts, which represent an abandonment of our efficient system of monetary exchange in favor of a semi-barbaric form of bartering.  

Still, even the most rational and Scroogey of economists must concede that gift-giving is clearly here to stay. What's needed is a bit of advice: What can economics tell us about efficient gifting so that your loved ones get the most bang for your buck?  

We need to start with the basic problem of gift-giving and barter in general: preference heterogeneity. Different people, in other words, want different stuff and they value it differently.  

In a system of monetary exchange, everything has more or less one price. In that sense, we can say that a Lexus or a pile of coconuts is "worth" a certain amount: its market price. But I, personally, would have little use for a Lexus. I live in an apartment building near a Metro station and above a supermarket; I walk to work; and driving up to New York to visit my family is much less practical than taking a bus or a train. So while of course I won't complain if you buy me a Lexus, its value ...

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