|between government and the citizenry (see Berger and Neuhaus 1977).|
Burton Weisbrod ( 1975) seminal economic theory of nonprofit organizations focuses essentially on James Douglas's categorical constraint. Weisbrod considers the implications of government as a provider of a particular public service to constituents with diverse preferences (demands) within a given political jurisdiction. The service is assumed to be a classical "pure public good," which is simultaneously consumed in the same quantity by all constituents once it is provided, and from which no one can be excluded. The government finances this good by imposing the same "tax-price" per unit of output on all citizens, no matter how much or little each values the good. Moreover, the government is assumed to use a voting mechanism to decide how much of the good to provide. For example, the use of majority voting would lead the government to provide an amount of the good that would correspond to the preferences of the "median voter," that is, the voter whose preferences fell in the middle of the distribution of voter preferences for this good.
The particular voting mechanism utilized is beside the point. The essential result is that one particular level of public goods provision will be selected and consumed by all voters, no matter what their individual preferences. Some voters may thus find the marginal value of the good less than the imposed tax-price and, hence, would prefer less of the good, and others may find the marginal value more than the tax-price and would prefer the government to provide more. Only those voters whose preferences resembled that of the median voter would be relatively satisfied. Thus, government is seen to be potentially inefficient in its provision of the good because it provides too much of it to some citizens and too little of it to others.
Weisbrod ( 1975) has considered various mechanisms available to correct such inefficiency. For example, he noted that people can move to different jurisdictions, where their preferences more closely match those of their neighbors ( Tiebout 1956). He has also pointed out that private goods can be purchases as partial substitutes when citizens desire more than government provides. For example, people can buy watchdogs and install burglar alarms to make up for a lower-than-desired level of police services. Finally, Weisbrod pointed out that when mobility and private consumption fail to fill the gap, nonprofit organizations can arise to provide public goods on a private, voluntary basis. For example, neighborhood watch organizations may arise to supplement governmental police services.
One of the important predictions of the Weisbrod theory of government failure is that it suggests that the nonprofit sector will be most active where citizen populations are most diverse, and that nonprofit organizations are important for satisfying the service needs of political minorities. Thus, the theory gives us insights into the important role of nonprofit organizations in a democracy in accommodating the needs of diverse groups and averting conflicts over government service policy ( Douglas 1987). It also helps to explain, at the international level, why some countries more than others rely on the nonprofit sector to provide public services. Estelle James ( 1987), for example, noted that the cultural diversity of such countries as Holland and Belgium helps to explain why these countries, have more significant nonprofit sectors than more homogeneous countries such as Sweden.
Other evidence of the utility of government failure to understand the role of private nonprofit organizations derives from examination of the sources of funding of these organizations ( Weisbrod 1988). In particular, Weisbrod presumes that if the function of the nonprofit sector is to provide public goods on a voluntary basis then a substantial fraction of their financing should derive from charitable contributions, gifts, or grants, rather than revenues from sales or membership fees. He thus created a "collectiveness index" from the ratio of contributions, gifts, and grants to that of the total revenues of nonprofit organizations in a variety of fields. The ratio was found to vary widely among industries in which nonprofit organizations participate, but substantial evidence was found to support the notion that nonprofit organizations classified as charitable (501 (c) 3) by the Internal Revenue Service enjoyed relatively high collectiveness indices (typically in the range of 20% to 40%) and hence were indeed providing collective goods on a voluntary basis.
DENNIS R. YOUNG
Berger, Peter L., and Richard J. Neuhaus, 1977. To Empower People. Washington, D.C.: American Enterprise Institute.
Douglas, James, 1983. Why Charity? Beverly Hills, CA: Sage.
-----, 1987. "Political Theories of Nonprofit Organization", chap. 3, pp. 43-54. In Walter W. Powell, ed., The Nonprofit Sector: A Research Handbook. New Haven: Yale University Press.
Hansmann, Henry, 1987. "Economic Theories of Nonprofit Organization", chap. 2, in pp. 27-42. In Walter W. Powell, ed., The Nonprofit Sector: A Research Handbook. New Haven: Yale University Press.
James, Estelle, 1987. "The Nonprofit Sector in Comparative Perspective", chap. 22, pp. 397-415. In Walter W. Powell, ed., The Nonprofit Sector: A Research Handbook. New Haven: Yale University Press.
Tiebout, Charles, 1956. "A Pure Theory of Local Government Expenditure". Journal of Political Economy (October): 414-424.
Weisbrod, Burton A., 1975. "Toward a Theory of the Voluntary Non-Profit Sector in a Three-Sector Economy". In Edmund S. Phelps , ed., Altruism, Morality, and Economic Theory. New York: Russell Sage Foundation.
-----, 1988. The Nonprofit Economy. Cambridge: Harvard University Press.