Friday, December 21, 2007
The Economics of Christmas
Not much going on in the world of politics. Congress is completing its task of quickly spending money before the year end by passing a bill that blocks the alternative minimum tax (AMT), Richardson is reminiscing the olden days - smoking cigars in Japan as a U.S. Ambassador, poor Giuliani is getting over the flu , and Barak Obama is on the toy war path; he proposes a full ban of imported toys from China.
As I read the Obama article, I thought: what will Moms and Dads buy their children for Christmas? According to the Wall Street Journal,
From a theoretical point of view, the secular representation of Christmas is that of a social planner problem. In theory, there are two types of models: the social planner model (very much like its political connotation) and the competitive equilibrium model (again, very much like its political connotation). The social planner seeks to maximize the welfare (happiness) of all agents in the economy. The competitive equilibrium model allows for markets to determine the allocation of goods. In theory, and if certain conditions hold, both models yield the highest and same amount of welfare.
Theoretically, Santa Claus is in charge of gift giving and not the markets – he is the social planner. He allocates goods (presents and coal) according to who has been good and who has been bad. Those who have been good are blessed with many presents, while those who have been bad are given coal. The economy of Christmas is full of many individual economic agents (the children). Each child writes Santa Claus a note indicating the presents that he/she desires; the presents that give each child joy. This represents a utility function in economics, where utility (joy) is dependent on the consumption of goods and services (each child’s choice of presents). Finally, the total welfare of Christmas is the spread of Christmas joy.
Santa’s economic problem: Santa is a social planner that chooses the allocation of presents and coal in order to maximize the joint Christmas joy of all the children, given several constraints.
Constraint 1: There is a goodness level for each child that is dependent on the child’s behavior over the past year; this level may be positive or negative.
Constraint 2: Each child specifies only those presents that give him/her joy.
Constraint 3: The total amount of presents demanded by the children cannot exceed the amount that Santa Claus has on his sleigh.
Constraint 4: Santa’s workshop is subject to an availability of resources: elves (labor), toy-building machines (capital), blueprints for toys, coal, etc.
Constraint 5: Santa’s workshop is subject to the available technology (they cannot make hover-craft skateboards yet) and the type of toy production in the workshop (perhaps the elves work in an assembly line).
Constraint 6: The toy-building machines may be used this year or next year and are subject to a rate of depreciation (older machines are slower and less-efficient at toy production).
Constraint 7: Santa only has 12 hours of delivery time on a magic sleigh.
Solution to the problem: The optimal allocation of presents and coal is delivered across the world in 12 quick hours. The globe is spread with the highest amount of Christmas joy.
And that is how Santa does it!
I welcome any comments that you may have. Nontruths