by Burton A. Weisbrod
Chap 1- 4 themes of the book - (1) informational inequalities (2)diverse demands (3)sources of revenue and the nature of its outputs (4) the nonprofit sector of the economy is interdependent with the goernmental and for-profit sectors.
Issues in the role of nonprofits in the mixed economy - 2 categories - (1)what kinds of activities should nonprofits engage in? (2) how should nonprofits be financed.
Activities - potential justification for nonprofits - due to failure of private markets (due to external effects or informational assymetries) or of government, or because of great diversity of consumer demands for collective action.
Financing - should they be permitted to engage in profitable activities to subsideze their unprofitable, collective type activities? if so, what limits should be imposed, in recognition of the effects of their profit seeking on the private economy?
if not, are we willing to accept a reduced level of activity in the non profit activity?
shoudl nonprofits be restricted to the activities for which they have been tax-exempt status, and restricted even further to financing only tru donations?
Different types of nonprofits - clubs (benefit members only), trust type, collective type nonprofits, for-profit in disguise (not true nonprofit)
3 key characterstics of nonprofits - (1)no one owns the right to share in any profit or surplus of a nonprofit (2) nonprofits are exempt from taxes on corporate income (3) some nonprofits reeive a variety of other subsidies - donations to them are tax deductible and they are exempt from many other forms of taxation in addition to the tax on corporate profits.
Chap 2 – Options among Institutional Forms.
3 major forms of institutions available to any society – proprietary, governmental and nonprofit.
Proprietary – efficiency in meeting consumer demands at minimum costs is main strength. Respond to wants and needs only if accompanies by money demand. Market failures caused by informational asymmetry, or when there is demand for collective-type goods affecting parties other then the seller and the buyer eg defense
Governmental – more incentive to respond to the demands of the political process. Finance through taxes. Effective in meeting collective demand.
Nonprofit sector- attractive in meeting heterogenous demands from minorities who are willing to pay for high levels of services. Their rationale has 2 components - (1)provision of collective goods (2) when consumer demands are heterogenous ie diverse. Nonprofits have better access to diverse, localized information, thereby overcoming some of the problems of over- and underutilization. Ie they can meet collective demands in situation of governmental “failures”.
Meeting diverse collective demands - findings that greater homogeneity in society leads to a larger role for government, greater satisfaction of collective demand and smaller role for non profit eg in Japan. Conversely in the US, a country of diversity, the nonprofit sector is sizable.
In US tax deductibility is used to encourage donations. In the UK, there is no tax deductability for charitable donations.
Which form to choose? This depends on (1) which is more efficient? This depends on the type of output. For well informed consumers, the proprietary institution is more efficient. For limited consumer information, the nonprofit or governmental is better. And also depends on (2) considerations of equity (3)cost per unit output – different forms is more cost efficient in a different quality range. Note that costs increase with quality output (4) quality of output required
The advantages and disadvantages of every form of institution are crucially related to informational problems.
So the Big Question is – how to reward behavior that contributes to public good?
Chap 3 – Incentives and Performance
Information is critical. Without it we cannot reward people or organizations that do what society wants or punish those who do the opposite.
Quote, pg43-44-
‘In short, the success or failure of any type of institution lies in its ability to obtain information on product quality and consumer demand and in its incentive to convey to consumers information on the extent to which its product meets that demand – that is, to use the information in socially desirable ways. For-profit, governmental, and nonprofit institutions differ both in their ability to obtain information on social wants and demands and in their incentives to act on it. As a result, each has a distinct niche to fill in an economic system. Institutional pluralism is vital.’
When society is using a particular form of institution to provide output, it is implicitly rewarding certain types of behavior.
Chapter 4 – Anatomy of the Voluntary Nonprofit Sector
3 principle categories – 1 private and 2 public types. These are
1.Proprietary / commercial eg trade association, clubs, associations
2. collective – external benefits to those that do not help finance the nonprofit eg museum
3.trust – combination of private goods and consumer protection eg nursing homes.
Taxes – (1)tax exempt and (2)donations which are tax deductible
Also, in the US the tax laws determine which organizations are classified as nonprofits and therefore tax exempt:-
a. Definition under US tax laws as organizations that are “organized for charitable or mutual benefit purposes”.
b. There are more than 2 dozen major classes of organizations included. See sect 501(c) for all the classes.
Why are some allowed tax-deductible status? – the tax deductibility amounts to a subsidy – these are given on the assumption that public encouragement is needed because otherwise there would be too little of these type of services provided – so they fit into categories, presumably, or providers of collective services or trust services. They help to meet the demands of persons who are unsatisfied by the level or quality of governmental provision of such services. – so public subsidies ought to reflect public benefits
The Collectiveness Index – a spectrum from purely private to purely public. An organization that provides purely collective goods, ie virtually all of the benefits from which accrued to persons who did not pay for them – should receive the highest measure of collectiveness. – these most justify public subsidies since they would receive little or no revenues either from sales or membership dues; if they received any revenue at all it would be in the form of contributions, gifts or grants (CGG).
So the collectiveness index is an indicator of the extent to which the organization provides external social benefits.
Thus, all nonprofits should not be lumped into one Nonprofit sector when their collectiveness index range between 1 – 97%
Chapter 5 – Charitable Donations
Policy choices on how to finance the nonprofit sector are not independent from decisions about the level and kinds of activities to be undertaken.
Source of financing is primarily from donations.
Table from page 90
Type of Organization Outputs Source of financing
For profit Private goods Sales revenue
Governmental Collective goods Taxes
Nonprofit Collective/trust goods Donations
Ability to solicit donations are dependent on several factors:-
1. Govt decision to give subsidies and the form of the subsidies
2. Limits on amount of its funds used for fundraising
3. Regulations and other policy measures
Also, donations are affected by
1 . tax rates
2. deductability of donations
4. fraction of organization’s revenues used for fundraising or administration
5. the organization’s age – seems to be a proxy for its trustworthiness
What drives the nonprofit organization in terms of fundraising?
They are not seeking to maximize profits, but one theory proposed and widely accepted is that they wwant to generate as large a total budget as possible. “This hypothesis is consistent with our evidence that each of the seven classes of nonprofits spent on fund raising up to the point at which the marginal contribution to gross organizational revenue is zero.” (p 101)
Chapter 6 – Revenue from Sales
p11
“Jerald Schiff and I hypothesized that nonprofits pursue the goal of maximizing their output of a “charitable” service, subject to the necessity of at least breaking even financially. We see the nonprofit organization as a potential provider of two kinds of goods or services – charitable and “private”; the organization’s managers and directors prefer t produce the charitable good, which is financed by private donations and by governmental support, but they may resort to selling private output to “cross-subsidize” their charitable activities. This model of behavior, to the extent it is correct, implies that private businesses do,indeed, have reason to fear that reductions in governmental support prompt nonprofits to extend their activities into markets for private goods.”
Q- whether nonprofits should be restricted, taxed , or even prohibited from competing with the proprietary sector – this question is becoming a policy issue.
So taxation policies and questions –
a. nonprofits are granted exempt status for broad purposes such as education or community development
b. how should the organization’s costs be allocated between it exempt and non exempt activities?
Society’s unwritten but de facto policy seems to point to the fact that public-type goods are produced by organizations funded by donations, private-type goods by those funded by sales.
Is it unfair to the proprietaries to allow nonprofits to enter business?
Must look at 2 arenas-
Arena 1 – competition in the specific industry for which the nonprofit has been given exempt status – this should not be controversial. The legislative process indicated that the govt determines that the nonprofit form is socially preferred on grounds either of efficiency or of equity, but non profits would not exist to an appropriate degree without subsidization – ie govt is deemed to have knowledge that leads to maximization of “social welfare”.
Arena 2 – competition in the market for unrelated outputs – questions of costs and revenues
Chapter 7 – Volunteer Labour
Value of donated time is tremendous. See p 132 for figures.
Chapter 8 - Are nonprofits really different?
If nonprofit is to perform a useful role,they must provide outputs that cannot be provided profitably by private enterprise.
Consumers who are well informed should be indifferent about the institutional form of a seller. All that should count is how satisfied the consumer would be with a particular seller’s output and its price. When consumers are underinformed relative to producers, however, they may turn to nonprofit organizations.
Chapter 9 – Recommendations for Public Policy
Nonprofit is - a component of a mixed economy AND It is consists of a vast array of institutional hybrids (many forms of institutions that combine elements of private enterprise and government).
IRS under present law is the principal regulatory body for nonprofits – thru tax-exempt and nonprofit status and also classified as tax deductible. But IRS has no power to limit entry into the sector.
So public policy should be directed towards 3 issues-
Kinds of outputs that they should/should not produce
Methods used to generate funds
Administrative mechanism or institutions
Goal for the proposals- (1)) to insulate nonprofits from pressures to deviate from their social role they can and should play in a modern and mixed economy and (2) to help move the economy to a better balance of institutional responsibilities among private enterprises, governments and nonprofits.
Proposals-
1.Nonprofits should be encouraged to provide collective goods, and not otherwise.
2.Non profits should be far more restricted from engaging in “unrelated business activities” that lie outside the range of their tax-exempt activities, and the scope of exempt purposes should be defined in more limited ways.
3. Interlocking control of nonprofits and proprietary firms should be abolished.
4. Tax deductibility should be dropped as the primary public encouragement for contributions – there are disadvantages .
5.To offset the effects of eliminating deductibility, tax credits should be adopted for contributions to approved nonprofits.
6. Special postal subsidies for nonprofits should be abolished and replaced by broader, less restrictive subsidies.
7. The IRS should be replaced as the principal regulator of the nonprofit sector – establishement of a new agency?
8. A comprehensive statistical program should be developed to provide data about the nonprofit sector – its size, composition, outputs, fund-raising activities, and interactions with the private market economy.
