Question

Why might gifts from extended family members have a greater deadweight loss than

those from either close friends or immediate family member?

Answer 1

Deadweight loss is a cost created and which is incurred by the society due to market inefficiency. It leads to inefficient allocation of resources. Similarly in the case of gift giving, there is a potential deadweight loss as the gifts may not be according to the taste and preferences of the receiver which leads to a deadweight loss.

Now in the case of gifts from close friends and immediate family members, they know the tastes and preferences of the consumer and in most cases give a gift which the receiver values above the price of the product. Close family members know what the person needs and demands and thus are able to be as efficient as possible in terms of gift giving, which reduces the deadweight loss and enhances the value of the product.

However in the case of gifts from extended family members, they don't know the exact tastes and preferences of the gift receiver and are not well informed, this increases the chances of the receiver being worse off as s/he doesn't value the gift and it ultimately destroys the value of the gift. Gifts in this case are not efficient and destroy value in the end in the economy.

Which is why gifts from extended family members have a greater deadweight loss than those from close friends as the value attached to the gift is higher when gifts are received from immediate family members.