Between Markets and Politics: A Social Choice Theoretic Appreciation of the Charitable Sector
George Mason Law Review, Vol. 6, p. 821, 1998
47 Pages Posted: 21 Aug 2008
Date Written: 1998
This Article provides a social choice theoretic interpretation (and appreciation) of the third, or charitable sector, of our economy. In Part I a general theory of institutional failure, based on Kenneth Arrow's "impossibility theorem", is presented. In Part II, the special significance of Arrow's theorem for both the pure market and pure government sectors is demonstrated. Each of these two sectors is shown to manifest the Arrow problem, albeit in seemingly quite different ways. In the market context, Arrow's problem shows up as the market's inability to provide pure public goods (a kind of inactivity that is symptomatic of attempting to satisfy the choice invariance that is required by Arrow's condition of independence of irrelevant alternatives); in the political context the exactly analogous problem of public goods manifests itself as political instability (a kind of activity excess, or cycling, that is symptomatic of social choice being invariantly responsive to different winning coalitions). Part III suggests how the charitable sector, by adopting a tax subsidized scheme of voluntary price discrimination for the provision of public goods, avoids Arrow's problem. Such price discrimination reduces the range of disagreement in preferences across individuals that otherwise (under non-discriminatory prices) would fuel political instability in the government sector. In the private sector, the tax subsidy encourages voluntary giving at these discriminatory prices only because it works most closely and effectively with a limited domain of individual preferences, namely, those preferences which are reciprocal to, or seek the assurance of, the voluntary giving of others. Such preferences are obviously very different from those conventionally assumed in the economist's "free rider" analysis of the public goods problem. Thus, the charitable sector's solution to the Arrow problem is based upon restricting the domain of individual preferences that are effectively admissible into social decision-making. Part IV describes how the charitable sector's solution to Arrow's problem is further secured through rules which require, first, that the entities granted charitable status be those that promote a genuine public good and, second, that these entities do not engage in political activity.
Suggested Citation: Suggested Citation