Why Nonprofits Organization Exist

Historically, nonprofits were largely made up of religious organizations supplying needs to people (Young, 2017). Over time, nonprofits have evolved in their roles and purposes within society, making it difficult to pinpoint what exactly they are and the reason for their existence (Anheier & Salamon, 2006). The nonprofit sector lies somewhere between the state and the market “where public and private concerns meet and where individual and social efforts are united” (Frumpkin, 2005, p. 1). Although nonprofits may not be the answer to each one’s failures, nonprofits exist to fill in the gap for government and market failure.

I will first discuss how nonprofits make up for market failure, then government failure, and lastly, I will discuss the relationship between these three sectors.

Market failure is when for-profits fail to meet consumers expectations of goods and services primarily due to inefficiencies (Steinburg, 2006). It is their profit driven nature that often causes failures within the market. Steinburg (2006) identifies three areas of market failure: underprovision, overexclusion, and contract failure. It can be in a for-profit’s best interest to underprovide if the price customers are willing to pay does not match the price companies want to sell a product/service. For-profits will also exclude those unwilling or unable to pay a certain price for a product causing overexclusion. Contract failure generally happens when businesses cut corners or underperform to help the company make more of a profit. Being inherently mission driven gives nonprofits the motive to make up for market failures. Nonprofits do not have the same motive for under providing and excluding those who won’t or can’t pay the demand price. Nonprofits are also able to respond to overexclusion with price discrimination and cross-subsidizing; this is something that can only be done by nonprofits (Steinberg, 2006). Being nondistrubtive, people tend to trust nonprofits more than the market, helping solve the problem of contract failure (Steinberg, 2006). Nonprofits are more concerned with output quantity and quality, as opposed to profits (Steinberg, 2006); therefore, are much less likely to cut corners to save money.

The main source government failure is dissatisfaction due to a diversity of opinions (Steinberg, 2006). Those who would like to see the largest quantity or highest quality, are where the government has failure in the areas of underprovision and overexclusion (Steinberg, 2006). Governments can have contract failure when it cannot detect people’s expectations that are not being met (Steinberg, 2006). Depending on the country, market failure also happens when the people are dissatisfied and have lost trust in their government due to conflict and corruption (Anheier et al, 2006). These government failures evoke a response from the nonprofit sector. When it comes to underprovision, nonprofits are able to provide collective goods where government is limited, and markets intentionally limit them for profit (Steinberg, 2006). Similar to nonprofits’ response to underprovision within the market, nonprofits will work alongside the government to supply unmet needs (Young, 2017). Governments must serve the median voter also causing overexclusion. Nonprofits don’t have to choose between conflicting policies, and instead are free to represent both sides, giving it an advantage over the government when it comes to the interests of people (Douglas, 1987). The government is also often tied up in bureaucratic red tape, something voluntary organizations aren’t as susceptible to, giving them more freedom (Douglas, 1987). Having to answer to the public directly and the fear of reelection gives the private sector less incentive when it comes to serving smaller interests groups that can cause dissatisfaction among the masses. Many times, the government also fails to detect minority or small group’s interests. Nonprofits, due to their size and motive, have an advantage at solving contract failure in the government by being able to identify issues that affect smaller amounts of people and either providing the services themselves or giving a voice to minority issues. In many other countries, when nonprofits arise out of conflict they seen as more trustworthy than government, also solving contract failure within the government (Anheier et al, 2006).

It is important to note that when the market fails, the government also steps in, just as when the government fails, the market is able to fill in the gap. Making up for failures is not unique to nonprofits. Frumpkin (2005) suggests that the reason it is difficult to define and explain the nonprofit sector is because the lines between nonprofits and businesses and the government are often blurred. It can prove difficult to differentiate where one sector begins and the other ends. These three sectors work in a triangular relationship where all three are needed in unique ways to best provide for people. Nonprofits also have failures that require the market and government to make up for its shortcomings. Each sector has its own solution to the others’ problems. All three sectors working together is what helps meet the public’s needs most efficiently and effectively. There will always be people who fall through the cracks and have unmet needs, even in a society that has all three sectors working together. Nonprofits do not perfectly fill in the gap where both the market and government fail, instead nonprofits exist to fill in as best they can. Without the nonprofit sector, the triangle would be incomplete, and there would be many more dissatisfied people with unfulfilled needs. Their existence is rooted in the need to fill a hole that is left open by markets and government.

Markets and governments constantly fail, causing a need for nonprofits. Nonprofits existence is based in the public’s needs to be met in these market and government failures. Nonprofits do not meet every failure, and even have their own failures, but their existence helps meet the publics needs more completely. Markets have their own failures that nonprofits are able to help uniquely alleviate; the same is true when there is government failure. The existence of nonprofits helps create a unique relationship that is used to best serve the public.

References:

1. Anheier, H.K. & Salamon, L. (2006). The Nonprofit Sector in Comparative Perspective. Ch 4* in W. W. Powell & R. Steinberg (Eds.), The Nonprofit Sector: A Research Handbook. New Haven, Connecticut: Yale University Press.
2. Douglas, J. (1987). Political Theories of Nonprofit Organizations. In Powell, W. (Eds.), The Nonprofit Sector: A Research Handbook (1st ed.) (pp. 43-54). New Haven, Connecticut: Yale University Press.
3. Frumkin, P. (2005). Ch 1 in On Being Nonprofit: A Conceptual and Policy Primer. Harvard University Press.
4. Steinberg, R. (2006). Economic Theories of Nonprofit Organizations. Ch 5 in Powell, W. W., & Steinberg, R. (Eds.), The Nonprofit Sector: A Research Handbook (2nd ed). New Haven, Connecticut: Yale University Press.
5. Young, D. R. & Casey, J. (2017). Supplementary, Complementary, or Adversarial? Nonprofit-Government Relations. Ch 1 in E. T. Boris & C. E. Steuerle (Eds), Nonprofits and Government (3rd ed).

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