The Non-optimality of For-Profit Firms Acting as Philanthropic Agents

Abstract

We present a model of the nonprofit organization that leads to an allocation in the economy that is Pareto Optimal. This is in contrast to the usual assumption that an economy in which individuals exhibit altruism will not lead to a Pareto Optimal outcome.  The presence of nonprofit organizations that function according to this model leads to an outcome in the economy that is Pareto Optimal. The result of Pareto Optimality is based on several assumptions, including the assumption that nonprofit organizations believe that they will not be earning any profit that may be brought forward to the following year. This result suggests an additional reason for the tradition in the United States of absolving nonprofit organizations and donors to such organizations from paying income taxes on such donations. The nonprofit organizations, by acting according to this model, are performing an important economic role in the economy by restoring Pareto Optimality to the economy.