Pareto Efficiency and Gift Giving

 When growing up my favorite gift was Star War Lego sets. I could build and play with them for hours on end, and since my parents were not a fan of letting me have a lot of “screen time” growing up I often did. So naturally when Christmas and my birthday rolled around I wanted Legos.. So what does this have to do with Economics? Well, gift-giving in theory is a Pareto efficient move, it's a move that makes someone (the recipient) better off without decreasing the utility of others (if the person giving the gift derives satisfaction from making the recipient happy that outweighs the costs of purchasing the good). However, in reality, it is not Pareto efficient its Pareto inefficient. We live in a world where gift-givers do not know their recipient's preferences perfectly and thus situations arise where it is possible to reallocate resources to make someone better off without decreasing the utility of others.

For example, there were many years when my Grandmother, who is very sweet and loving, would get me nice button-down tees, which I despised wearing. If the shirts and the Legos cost the same and my Grandmother derives the same amount of utility from seeing me with Legos or with shirts then moving to the bundle where I receive the Lego Star Wars is a pareto efficient move. While I tried leaving hints over the year that I really wanted a Star War Lego set she never caught on and so we were stuck in a Pareto inefficient equilibrium. And this happens with most gifts unless someone is given a cash transfer, which is typically seen as taboo. Even when I received a Lego Treehouse set it still was not Pareto efficient equilibrium because I preferred the Lego Star Wars set (costs being the same). I know this sounds like I was being ungrateful but ultimately it doesn’t change the fact that it was not my preferred choice. I do not think the takeaway is that we shouldn’t give gifts, rather I think this should make us realize that maybe gift-giving is more about kindness and acknowledging the important people in our life than the gift in and of itself.