On the Economics of Philanthropy

Friedman says that he accepts this argument 'as justifying governmental action to alleviate poverty'. Economists will be familiar with this kind of argument. Someone takes as a premise that a particular activity is the subject of altruistic concern by individuals; he shows that, if matters are left to unco-ordinated private philanthropy, a free-rider problem will arise; and then he claims that this problem can be solved by some kind of intervention by government. This strategy has been used to justify many kinds of intervention, including compulsory transfers of income through the tax system (Hochman and Rodgers, I969), public policy to stimulate saving and investment (Marglin, I963; Sen, I967) and the subsidisation or public provision of health care (Arrow, I963; Lindsay, I969; Culyer, I976). This whole line of argument rests on a particular theory of private philanthropy, which in turn relies on three principal assumptions. First there is the publicness assumption: the charitable activity in question say, the relief of poverty or the provision of health care is a common argument in many individuals' utility functions, and so is a public good in the theoretical sense (Samuelson, I954). In some cases of private philanthropy, it is indisputable that the charitable activity is a public good from which donors derive utility. Consider, for example, the case of yachtsmen contributing to the Royal National Lifeboat Institution, or potential cancer victims contributing to the Cancer Research Campaign. In other cases the assumption takes on a rather different character. Rich Britons contribute towards famine relief in Cambodia; childless old age pensioners contribute towards the care of handicapped children. In such cases one would have to be extremely cynical to believe that the charitable activity furthers the self-interest of the donor in any significant way; but one might suggest that, for purely altruistic reasons, the donor derives utility from knowing that less fortunate people are being made better off. Such an effect will be called an altruistic externality. Friedman, along with all of the other writers quoted in the first paragraph of this paper, relies on altruistic externalities to justify the publicness assumption. The second assumption is that of utility maximisation: each individual's decisions concerning his philanthropic