Do freely competitive markets misallocate charity? A comment on Tullock's analysis

From the standpoint of Pareto optimality, Tullock's arguments concerning systematic misallocations of charitable contributions and information regarding the use of charitable contributions in a competitive equilibrium are restricted to the empirically rare case in which the recipients are fixed in identity and unable to do anything to increase the size of their individual grants. (7) In the empirically general case, there is no special role for the government's provision of charity in a competitive equilibrium. It is possible that the government has a role in reducing the costs of certain transactions between the parties involved in charity, but this role is theoretically no different than that which it has in allocating ordinary goods, and no plausible model exists for describing the role with respect to charity. Assuming that this particular role is optimally fulfilled so that the cost of each transaction is determined, there would be a definite loss in welfare in the case of a private-good-charity if the government proceeded to tax or subsidize the charitable contributions of either individuals to charitable institutions or of chartitable institutions to the ostensible recipients of the charity. There would also be a definite loss in this case if the government taxed or subsidized the production of deceptive informaiton. Copyright Thomas Jefferrson Center for Political Economy, Rouss Hall, University of Virginia 1968