Transcript The Nonprofit Sector

Mixed Economies & Market Failure
All economies must answer 3 questions.
 What goods & services should be produced?
 How should the goods & services be
produced?
 Who gets the goods & services that are
produced?
Two extreme types of economies
communism or socialism
capitalism
Who owns & controls the physical capital?
In communism & socialism: the government
In capitalism: private parties
How are resources allocated?
In communism & socialism:
through central planning & government
administration.
In capitalism:
through contractual agreements
between private parties.
In the real world, there are no purely
communist or socialist economies and no
purely capitalist economies.
All economies are mixtures.
Some sectors of all economies are privately
owned and controlled and some sectors are
owned and controlled by the government.
The extent of the mix differs from economy to
economy.
Mixed Economies
capitalistic
or market
economies
U.S., Canada,
Australia, Japan,
most of western
Europe
communistic/socialistic
or centrally-planned
economies
Sweden, India,
Israel
Russia, China,
N. Korea, most of
eastern Europe
Regardless of the type of economy, it
is important to remember that people
respond to economic incentives.
Example
In the former Soviet Union, managers producing
window glass were rewarded by the number of pounds
of glass they produced. What was the result?
Very thick glass.
They changed the reward system to be based on the
quantity of glass as measured by the area. The result?
Ultra-thin glass.
Conclusion: People respond to incentives, so be
careful what you reward.
Reasons Markets May Fail to Attain an
Ideal Allocation of Resources
Lack of competition
Externalities
Public goods
Lack of Competition
Firms may collude to limit output and keep
prices high.
Externalities
Externalities are spillover effects.
Good externalities are external benefits.
Bad externalities are external costs.
External Benefits
benefits generated by the action of an
individual or group that favorably influences
the welfare of non-paying parties
example: gardens
External Costs
costs that result from an action of an
individual or group that harms the welfare of
non-consenting parties.
examples: litterbugs, drunk drivers, polluters
Social Benefits
social benefits = private benefits received by the
decision-maker + any external benefits.
When there are no external benefits, private and
social benefits are equal.
Social Costs
social costs = private costs incurred by the
decision-maker + any external costs.
When there are no external costs, private
and social costs are equal.
Example
project cost to a firm : $1500
amount of aggravation to neighbors: $500
What is the social cost?
social cost = private cost + external cost
= 1500 + 500 = $2000.
Example continued
project cost to a firm : $1500
project revenues to firm: $1800
If the firm ignores the effects on the neighbors, will the
firm undertake the project?
Yes, the firm will undertake the project, because
private benefits ($1800) exceed private costs (1500).
From the viewpoint of society, however,
the project should not be undertaken.
recall: social cost = $2000
project revenues to firm = $1800
social benefits = private benefits + external benefits
= $1800 + $0 = $1800
Since social costs > social benefits,
the project should not be undertaken.
Coase Theorem
An acceptable solution to an externality will be
found if
• ownership of property is clearly defined,
• the number of people involved is small,
• the costs of bargaining are negligible.
In many situations, many people are affected
and the costs of bargaining are substantial.
These types of problems are unlikely to be
resolved appropriately without government
intervention.
External Costs
price
Supply - taking externality
into consideration
Supply - ignoring
externality
P2
P1
Demand
quantity
Q2
Q1
Effects of External Costs
When an external cost is ignored,
the price is too low, and
the quantity is too high.
External Benefits
price
Supply
Demand-taking externality
into consideration
P2
P1
Demand - ignoring
externality
quantity
Q1 Q 2
Effects of External Benefits
When an external benefit is ignored,
the price is too low, and
the quantity is too low.
Public Goods
Examples:
• national defense
• dams
What are the characteristics of these
goods that make them public goods?
Characteristics of Public Goods
Public goods are jointly consumed goods. If one
person gets the good, everybody gets it. One
person’s consumption of the good does not
diminish the amount available for others to
consume.
Also, the good can not divided up into separate
portions for different individuals. Once a public
good has been provided to one person, there is
no easy way to prevent others from consuming it
as well.
national defense - everyone is protected by
the same defense system
dams - everyone in the community is
protected from flooding by the dam
Why Public Goods Cause Problems in a
Market Economy
There is an incentive to not reveal your true valuation, since if the
good is provided, you are going to get the use of it anyway.
But if everyone refuses to reveal their true value of the good and
so refused to voluntarily pay what it is worth, the good will not be
provided.
This is where the government is useful. The government tells
everybody what to pay and everybody has to do it. Then the
government has the money to pay to have the good produced.
So far, we have discussed two major sectors of
the economy.
The first consists of for-profit businesses, and is
the largest sector in the U.S. economy.
The second sector is the government.
We will examine now a third sector, which
consists of nonprofit organizations.
The Nonprofit Sector
The term “nonprofit sector” describes institutions
and organizations that are neither government nor
for-profit businesses.
It is also sometimes called the third sector, the
independent sector, the philanthropic sector, or the
voluntary sector.
Outside the United States, nonprofits are often called
nongovernmental organizations (NGOs).
What does nonprofit mean?
Nonprofit organizations are not forbidden to
generate a profit, but if they make profits,
these profits may not be distributed to
owners or other private persons.
This nondistribution constraint is imposed on
the organizations by the charter under
which they are organized under state law.
Four Main Types of Nonprofit Organizations
1.
2.
3.
4.
Public Benefit Service and Action
Member-Serving
Religious
Funding Intermediaries
Public Benefit
Service & Action
The missions of these
organizations include
providing health care,
providing education,
promoting the arts, and
ensuring civil rights.
While organizations such as
animal shelters are in this
group, the largest of these
organizations are usually
hospitals and educational
institutions.
Member-Serving
These nonprofits provide benefits to
their own members.
Examples: professional organizations
(such as the American Medical
Association), labor unions, political
parties, and social clubs.
Religious
Churches, Synagogues, Mosques,
and related organizations.
Funding Intermediaries
These include charitable
foundations (such as the
Ford Foundation) and
funding federations (such
as the United Way).
How large is the nonprofit sector?
This sector includes about 1.6 million
organizations, or more than 6% of all
organizations of all types (nonprofit,
for-profit business, & government) in
the U.S.
We have established that while the market
system works well, it is far from perfect.
The nonprofit sector represents one of the
ways that the U.S. economy attempts to adjust
for the imperfections.
Winston Churchill once made a statement
about democracy. A similar statement can be
said about the market system. Churchill said:
“Democracy is the worst form of government
except all the others that have been tried.”
In a perfect world, no one would be hungry,
cold, or homeless.
In addition, all incentives would operate in a
fair and equitable manner.
In the real world, that is not the case.
That brings us to the subject of
Poverty & Income Inequality
One way of examining income inequality is
by looking at the shares of different quintiles
of the population.
For example, what percent of all the income
in the U.S. is in the hands of the poorest
20% of the population, and what percent is
in the hands of the wealthiest 20%?
Perfect Equality Income Distribution
Percent of Population
Percent of Income
“Poorest” 20%
20
Second 20%
20
Third 20%
20
Fourth 20%
20
“Richest” 20%
20
Perfect Equality
Cumulative Income Distribution
Percent of Population
Percent of Income
Bottom 20%
20
Bottom 40%
40
Bottom 60%
60
Bottom 80%
80
All 100%
100
A graph of the cumulative
income distribution is called the
Lorenz Curve.
Graphing Income Distributions
1.00
0.80
0.60
0.40
0.20
0
0
0.20
0.40
0. 60
0.80
1.00
Proportion of Population
Perfect Equality Line
1.00
Perfect
Equality Line
0.80
0.60
0.40
0.20
0
0
0.20
0.40
0. 60
0.80
1.00
Proportion of Population
In the hypothetical situation of
perfect inequality,
one person has all the income,
and everyone else has nothing.
Perfect Inequality
1.00
0.80
0.60
Perfect
Inequality
0.40
0.20
0
0
0.20
0.40
0. 60
0.80
1.00
Proportion of Population
U.S. Household Income
Distribution in 2011
Percent of Population
Percent of Income
Poorest 20%
3.2
Second 20%
8.4
Third 20%
14.3
Fourth 20%
23.0
Richest 20%
51.1
Source: http://www.census.gov/prod/2012pubs/p60-243.pdf
U.S. Cumulative Household Income
Distribution in 2011
Percent of Population
Percent of Income
Bottom 20%
3.2
Bottom 40%
11.6
Bottom 60%
25.9
Bottom 80%
48.9
All 100%
100
Source: http://www.census.gov/prod/2012pubs/p60-243.pdf
Lorenz Curve for the U.S. in 2011
1.00
0.80
0.60
0.40
Lorenz Curve
0.20
0
0
0.20
0.40
0. 60
0.80
1.00
Proportion of Population
The greater the extent of income inequality, the further the Lorenz
Curve sags from the perfect equality line and the larger is area A.
1.00
0.80
0.60
A
0.40
Lorenz Curve
0.20
0
0
0.20
0.40
0. 60
0.80
1.00
Proportion of Population
We can capture the extent of inequality
using a single number called the
Gini Coefficient or Gini Index.
The Gini coefficient is the ratio of two areas.
Numerator: area between perfect equality line
& Lorenz curve.
Denominator: area of the triangle below the
perfect equality line.
Gini Coefficient = A / (A+B)
1.00
0.80
0.60
A
0.40
0.20
B
0
0
0.20
0.40
0. 60
0.80
1.00
Proportion of Population
The greater the extent of income inequality
(and the further the Lorenz Curve sags from
the perfect equality line), the larger is the Gini
Coefficient A/(A+B).
The Gini Coefficient is a number between 0 & 1.
0 means perfect equality
1 means perfect inequality
How has the U.S. income distribution
changed in the past few decades?
Percent of
Population
Poorest 20%
Second 20%
Third 20%
Fourth 20%
Richest 20%
Percent of Income by Year
1970
4.1
10.8
17.4
24.5
43.3
1990
3.8
9.6
15.9
24.0
46.6
2011
3.2
8.4
14.3
23.0
51.1
Sources: http://www.census.gov/prod/2008pubs/p60-235.pdf ;
http://www.census.gov/prod/2012pubs/p60-243.pdf
The share of the wealthiest group has increased,
while the shares of all the other groups have decreased.
Gini Coefficient in the U.S
1970
0.394
1990
0.428
2011
0.477
These figures reflect an increase in
income inequality.
Gini Coefficients for Distribution of Family Income
Rank
1
2
14
24
26
41
50
74
75
95
96
98
106
108
114
119
129
130
135
141
Country
Lesotho
South Africa
Chile
Mexico
China
United States
Russia
Israel
Japan
Poland
Spain
Ireland
United Kingdom
Canada
France
Australia
Germany
Finland
Norway
Sweden
Gini Coefficient
Date
63.2
63.1
52.1
48.3
47.3
45.0
42.0
37.6
37.6
34.1
34.0
33.9
32.3
32.1
30.9
30.3
27.0
26.8
25.0
23.0
1995
2005
2009
2008
2013
2007
2012
2012
2008
2009
2011
2010
2012
2005
2011
2008
2006
2008
2008
2005
Notice that countries
with the most inequitable
income distributions
have Gini coefficients in
the 60’s while those with
the most equitable
distributions are in the
20’s.
The countries that we
tend to consider our
peers are generally in the
30’s, which indicates
greater equality than the
US at 45.0.
From: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html .
Closely related to the concept of income
distribution is the notion of poverty.
What is Poverty?
“Poverty
is a lack of those
necessities that the
custom of the country
renders it indecent for …
people …to be without.”
--Adam Smith
History of the Official Poverty Measure
In 1963, the Council of Economic Advisors
developed a poverty measure that took into
account “minimally adequate food intake.”
That measure was called the poverty threshold.
Poverty Thresholds
Poverty thresholds are the dollar amounts used to determine
poverty status.
If total family income is less than the threshold appropriate for
that family, the family is in poverty.
Each person or family is assigned one out of 48 possible
poverty thresholds, which vary according to
Size of the family
Ages of the members
The same thresholds are used throughout the U.S.
The thresholds are updated annually for inflation using the
Consumer Price Index.
Source: http://www.census.gov/hhes/poverty/povdef.html#1
Poverty threshold for a family of four
1963
2013
$3,100
$23,550
Poverty Patterns
• Poverty rates among Blacks, American Indians,
and Hispanics are much higher than among
Whites and Asians.
• Poverty among the under-18 population is higher
than for other age groups.
• Poverty rates are lower for married-couple
households and higher for female householder
families.
Area Poverty Rates
2007-2011 (%)
U.S.
14.3
Pennsylvania
12.6
Delaware County
9.5
Chester
32.3
Other Statistics Comparing Chester to the U.S. as a Whole
Statistics (2007-2011)
U. S.
Chester
8.7
16.5
$64,293
$34,856
Population over 25 that has not
completed h.s. (%)
14.6
23.5
Child poverty rate (%)
20.0
48.3
$186,200
$71,700
Unemployment (%)
Median family income
Median value of
owner-occupied housing
From: factfinder2.census.gov
Income vs. Wealth
We have talked about income inequality.
Income refers to the flow of money.
When you look at the stock of money that
you have accumulated, that is wealth.
People who have very little income are
unable to save anything. So they have
no accumulated money, no wealth.
People who have more income are more
able to save and invest their money.
So while income in the U.S. is distributed
very unequally, wealth is distributed even
more unequally.
Video:
Wealth Inequality in America
(about 6 mins)
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03
/06/this-viral-video-is-right-we-need-to-worry-about-wealthinequality/
Based on: Norton, M.I. & Ariely, D. (2011). Building a
Better America - One Wealth Quintile at a Time. Perspectives
on Psychological Science, 6, 9–12.