Reciprocity: The Supply of Public Goods Through Voluntary Contributions

TLDR

Modern economies finance goods through charging consumers, taxes, or voluntary contributions, the latter exemplified by services such as lifeboats, blood transfusions, and cultural institutions that rely on unpaid donors. The paper proposes a theory of the voluntary sector grounded in the assumption that most people view free riding as morally wrong.

Abstract

In modern economies, there are two main ways of financing the production of goods and services. One way is by charging consumers: if you consume, you must pay. The other way is by raising taxes: whether you consume or not, you must pay. But there is also a third way, characteristic of what I shall call the voluntary sector, which is to finance production out of voluntary contributions: whether you consume or not, you choose for yourself whether you pay. There can be no doubt that this third method does sometimes work. In the United Kingdom, for example, the lifeboat service is financed by voluntary contributions and the blood transfusion service is dependent on unpaid donors. Much medical research is funded by gifts; many theatres, orchestras and sports clubs are able to continue only through the success of their fund-raising appeals; trade unions manage to exist where there is no compulsion on anyone to join. This is an economic phenomenon that needs to be explained. In this paper I shall propose a theory of the voluntary sector, based on the assumption that most people believe free riding to be morally wrong.