The relative efficiency of private and public transfers

Our analysis has incorporated important comparative strengths and weaknesses of public vs. private finance of collective goods. However, we have abstracted from other factors relevant to the comparison. For example, while allowing taxes to deviate from benefits, it was assumed that such taxes would be non-distorting. A more general model would take into account the deadweight losses resulting from use of non-lump-sum taxes. However, the qualitative impact of incorporating deadweight losses seems clear. Since private contributions to charity would not entail any deadweight loss, taking such deadweight losses into account would lower the relative efficiency of public financing. We have also assumed that charities would, in fact, be responsive to donor tastes and preferences. Relaxing this assumption, for example, to permit charities to maximize an objective function different from that of their own contributors, would reduce the relative efficiency of private transfers (for example, see Rose-Ackerman, 1982). We have also explicitly ignored the welfare of recipients. Inclusion of recipients in the social welfare function would tend to enhance the relative efficiency of public transfers whenever the level of total contributions was greater under public than under private financing. Finally, our comparisons have focused on the polar cases of private or public financing. In practice, the choice is more likely to be between greater or lesser reliance on one form of finance within a mixed public-private system (see Warr, 1982). We do not, however, view this as a serious limitation of our analysis. Those factors which enhance or diminish the relative efficiency of private transfers in the polar case also determine the relative advantages of private transfers within a mixed system. Copyright Martinus Nijhoff Publishers 1986