Can Buy Me Love: Economics of Valentine's Day

In the wise words of Prophet McCartney, you can’t buy me love. Or can you?

As Professor Dan Ariely of Duke University expressed in an interview, Valentine’s Day is not all about love; in the eyes of an economist, it is just another highly commercial holiday. With Valentine’s Day upon us, many are relentlessly searching for that gift or basket of goods that will satisfy the courted and potentially lead to exchange of bodily fluids (yes, you know that this is the ultimate utility maximizing activity). Some may say that this is an incredibly pessimistic view, but economics is a dismal science after all. Nevertheless, no one can deny the fact that exchanging gifts lead to increase in utility for everyone involved in this economic activity.

The question then becomes “What are some of the gifts that you can give to another person to maximize utility?” By examining the economic consequences of various gifts, this article attempts to find the perfect gift that has positive effects on both microeconomic and macroeconomic scales.

The Inevitable - Roses and Chocolates
It seems rather intuitive to assume that for florists and chocolatiers, Valentine’s Day is Christmas and New Year’s bundled into one: they see a tremendous increase in demand, soaring prices, and skyrocketing sales. This is of course good news for exporters of rose and chocolate also. However, despite some positive macroeconomic effects (which are highly concentrated), these gifts have detrimental effects on personal utility. Granted, both roses and chocolates have immediate effects that give satisfaction to its consumers. Roses give visual and olfactory pleasure through its beauty and fragrance; chocolate consumption induces an increase in the serotonin level, chemically forcing temporary happiness on an individual. However, roses wilt, and throwing them away causes emotional pain to the consumer, decreasing the utility of receiving them significantly. Too much chocolate causes increased blood sugar levels and obesity due to its high caloric nature, thus creating a long-lasting negative utility. From the above observations, we can conclude that roses and chocolates are not the ideal gifts.

The Compromise - Restricted Monetary Equivalents
Restricted monetary equivalents (i.e. gift certificates) are among the most popular gifts in the United States. The Consumer Reports ranks gift certificates as the second-most given gifts in the US and the most wanted gift by women. For those who are stuck in the dilemma for choosing a present, this fact is probably the light at the end of a long dark tunnel of searching. Now, with an economic mindset, let us consider why gift certificates are in such high demand. For a consumer, RME’s are as good as cash; there are many number of goods (and combinations of goods) that can be purchased with the given gift card. Upon casual inspection, it may seem as if gift cards maximize consumer utility, but this is not entirely true. Because gift cards are only accepted at certain stores, this severely limits the goods available for the consumer. For example, let’s assume I received a gift card for Best Buy. However, because I own all electronics that I need at this point, I have nothing to buy at Best Buy. In this case, the gift card produces a utility of zero; as a matter of fact, it might even result in negative utility because I will resent the person giving me the present since she was not able to accurately assess my needs. Gift cards also yield limited macroeconomic effect because consumption will not rise immediately and even if it does, the profits will only be allocated to a handful of manufacturers that are involved in the production of goods purchased with the gift certificate.

The Perfect Gift - Cash
Simple, direct, and functional. This is the gift of love, the panty peeler. Unlike the RME’s, cash can be used to purchase an infinite number of goods; it neither wilts like the flowers (unless a severe economic recession takes place today), nor causes corpulence like the chocolates. A cash gift has a positive income effect on the receiver due to his/her increase in real income, shifting the entire utility curve to a higher point than before, greatly increasing happiness. The cash can be used to purchase many different combinations of goods, increasing aggregate consumption along with aggregate expenditure and distributing profit to a much more diverse range of producers. An envelope full of cash not only maximizes personal utility, but stimulates the economy, which improves aggregate welfare.

Dimes and Dames
Of course not everyone is a rational consumer. There is always this petty emotion called “love” that prohibits people from making the economically correct decision of giving cash as gifts on Valentine’s Day. If you are a reader who can put aside this nuisance and the desire to impress your significant other for a very short period of time, it should be clear that what I’m suggesting is not only valuable for your social agenda, but also for the aggregate economy. You can even make the argument that the cash gift essentially makes you a philanthropist; and the last time I checked, many philanthropists were dating models.

Photography: http://stylezineblog.tistory.com/401