Posts Tagged ‘Charity’

Question for the commentariat:

Is the distribution of wealth to the needy through taxes morally superior to distribution through charity? Why or why not?

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It seems to me that most justifications for government welfare programs are moral arguments that claim the right and obligation of government to take money from the rich and give to the poor.  My intuition is that this argument is misguided, but I won’t address that here.  Instead, I’m interested in another argument, an actual economic one.  It’s one that isn’t often made, but it’s quite provocative.  The claim is that charity produces positive externalities, and because of this, it should be provided as a public good.

Now, it’s important to note that when economists talk about a public good, they mean a good that is non-rivalrous and non-excludable.  This means that one person’s consumption of the good does not detract from another person’s consumption of it, and that it is difficult or prohibitively expensive to exclude people from using it so that they could be charged for their use.  There are varying degrees of these two dimensions for different goods, but the purest example of a public good cited is national defense.

Lots of activists and politicians clamor for the government to provide things as public goods, but saying so doesn’t make it so.  A private good, which is excludable and rivalrous, is usually best provided on a market, where it is efficient.  You can prevent me from eating an ice cream cone, and your consumption of an ice cream cone diminishes my ability to enjoy it.  The justification for government provision of public goods is much more solid.

Is charity is a public good?  The first premise of the argument is that people care about one another.  They get utility from helping other people, even strangers.  I see this intuitively, but evolutionary psychology proves this.  To illustrate, suppose that you encounter a desperate stranger who informs you if he does not acquire $10.00 in the next ten minutes to buy medicine, he will die.  No one else around has $10.00.  Suppose you believe all this to be true.  You will probably give him $10.00 if you have it.

The second premise of the argument is that when individuals donate to charity, non-donors also get utility from knowing that people are being helped.  The claim is that there is a positive external effect, so there is an incentive to be a free rider.  If people get utility from the actions of others, they will not donate as much as they otherwise would if they only got utility from making the donations themselves.

You can see that the conclusion is for government to tax people and provision charity because private charity does not provide enough.  It is claimed that charity is a public good.  One person’s donation does not diminish utility for another, and it is difficult to exclude a person from feeling good when they know that the poorest in society are cared for by the people who donate.

I take issue with the second premise and therefore the conclusion.  The two premises together constitute a fallacious equivocation.

Yes, people get utility from making a donation, but they do not, in any meaningful amount, get utility from knowing that other donors exist.  My problem is that there is an obvious limit on how much utility people get from knowing about some social problem.  The knowledge must be local for a person to get utility; people can only get utility from helping people that they know about.  It would be silly to ask even a bleeding heart who regularly gives money to beggars how much they’d be willing to donate to a beggar across town that they have never encountered.  The natural capacity to help people, as evidenced by revealed preferences, is certainly not the same thing as utility from the knowledge that people are being helped by others.

These supposed external effects of charity do not really exist in any meaningful way.  People aren’t doing a mental calculation of how much they forgo in donations because other donors cover them.  I concede that this is actually a problem for many, if not most, public goods.  People don’t really know what they might pay for a public good that wouldn’t exist if it were not provided collectively.  Still, regarding charity, people get utility from being involved in giving, not nebulously understanding that donations have been made by other people.

It’s incoherent to suggest that because of positive externalities the government should arbitrarily provision some higher amount of money in a welfare program than what private charities already provide.  Such externalities do not exist.

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