Opportunity Costs and Charitable Giving
By Tracey Fritz
Graduate Student, Ferris State University - Grand Rapids Campus
Opportunity cost is making an investment that is the difference between the return on one investment and the return on an alternative (Merriam Webster Online). It can also be explained as the cost of the next best thing you give up when you make a choice (Bently and Nissan 1996, 6).
Charity is generosity and helpfulness especially toward the needy or suffering and also, aid given to those in need (Merriam Webster Online). Giving tendencies generally refer to charitable donations of money, although giving can also incorporate in-kind gifts (Bently and Nissan 1996, 6).
An example of the opportunity cost of charitable giving would be the potential loss of income one might endure when choosing to give to a charity. Another opportunity cost of charitable giving may also be the potential loss of income to a charity when you choose not to give to as a result of giving to another charity.
Historically, giving to a charity was looked at as alms giving. Money was given directly to the needy to help meet basic needs such as food and clothing. Before the 1900s, organized charitable funding organizations did not exist (Kirsch Foundation). “The Christian notion of charity giving is unquestionably the strongest single influence in the rise of the West’s unique tradition of giving, caring, and philanthropy” (Guinness 2001, 108).
During the industrial age, entrepreneurs helped move the idea of alms giving to what is know today as charity. Social problems were the focus of newly established foundations such as the W.K. Kellogg Foundation and Carnegie Foundation (Kirsch Foundation). The next shift of thinking came with the introduction of wealth in the late 1990s from the technology boom. Individuals, such as Bill Gates, had accumulated massive personal wealth and decided to use some of that wealth to address social problems through charitable giving.
Charitable giving is vital to the stability of the nonprofit sector. The nonprofit sector is a vital economic source in many regions around the world. “If the nonprofit sector throughout the world was a separate national economy, it would be the world’s eighth largest economy” (Salamon and Anheier 1999).
The opportunity cost of charitable giving can be looked at in many ways. When an individual chooses to give to a charitable organization, he or she may choose to give time, talent or treasure. When making a choice to give time, time becomes the opportunity cost. Time that could have been used for something else is lost. The loss of time is the opportunity cost of charitable giving.
Another opportunity cost of charitable giving would be the potential loss of income to the individual, as well as to another charitable organization not benefiting from the donation. When Andrew Carnegie chose to donate money to help communities build libraries, he had to make the choice not to donate to other worthy causes in order to use his money for the libraries. His opportunity cost was the charity that didn’t receive his donation as a result of his donation to build the libraries.
Looking at opportunity cost from another prospective, it might be determined that a loss of social capital is experienced when an individual chooses not to give to a charitable organization. Social capital is a community’s ability to come together to meet a need. Without willing individuals, needs will not be meet.
Ties to the Philanthropic Sector
Citizens have a responsibility to give back to their communities. They must engage in active citizenship. This comes with an opportunity cost, but the benefit to the common good should outweigh that cost. Today, studies have shown that 50% of Americans give an average of four hours per week to organizations of their choice. Three out of every four Americans regularly contribute to nonprofit organizations. This accounts for, on average, $1000 per family every year and 90% actually comes from individuals rather than foundations and corporations (O’Connell 1999, 56-57). “One hundred million Americans are involved in an extraordinary array of acts of compassion and service. They inform, protest, assist, teach, heal, build, advocate, comfort, testify, support, solicit, canvass, demonstrate, guide, feed, monitor, and in a hundred other ways serve people, communities, and causes” (O’Connell 1999, 57-58).
Key Related Ideas
Community need is a condition or situation in which something is required or wanted by citizens. When individuals make a choice to give to a charitable organization they must first assess community need.
Cost is the total amount of money, time, and resources accumulated when you make a choice, such as a purchase or an activity. Your cost also directly relates to your opportunity cost when giving. The cost or value of what you are giving up by making the choice should always be evaluated. The loss of time is often a high cost resource because time is a scarce commodity.
Nonprofit Sector is the portion of the market economy composed of organizations providing goods and services, but not seeking to produce a profit. It is the sector of our economy that encompasses charitable giving.
Important People Related to the Topic
Andrew Carnegie (1835-1919): Carnegie was an active philanthropist. He believed that his fortune should be used for good and should be disposed of rather than saved. He created seven philanthropic and educational organizations. Andrew Carnegie was able to give away $350 million dollars before his death. One of his major philanthropic contributions was his determination to help communities build libraries. He helped to build 2,509 libraries by donating over $56 million dollars (Carnegie Corporation). For more information, see the Learning to Give briefing paper on Andrew Carnegie.
Will Keith Kellogg (1860-1951): Kellogg was the founder of W.K. Kellogg Foundation and an active philanthropist in the United States. He is also known as the cereal industry giant. He supported a wide range of charitable causes. He focused on causes that would benefit young people. “President Herbert Hoover named him a delegate at a White House Conference on Child Health an Protection” (W.K Kellogg Foundation). For more information, see the Learning to Give breifing paper on W.K. Kellogg.
Related Nonprofit Organizations
- ARNOVA is an international membership organization dedicated to fostering understanding of the nonprofit sector, philanthropy and volunteerism (http://www.arnova.org).
- The Endowment Development Institute is a global leader in the development, revitalization and management of charitable organizations and is a leader in philanthropic consulting (http://www.endowment.com).
- The Fidelity Charitable Gift Fund is an independent public charity. It strives to further the American tradition of philanthropy by providing programs that make charitable giving simple and effective (http://www.charitablegift.org).
Related Web Sites
- Charity Navigator Web site, at http://www.charitynavigator.org, works to guide intelligent giving by providing ratings over 5,000 charities by using 990 forms. The ratings are driven by two objectives: helping givers and celebrating the work of charities. Before making a decision to donate, givers can first determine the financial health of a particular nonprofit organization.
- Internal Revenue Web site, at http://www.irs.gov/charities/contributors/index.html, provides information for charitable givers including a brief description of the disclosure and substantiation requirements for contributions to charitable organizations; information on how to claim a deduction for charitable contributions; a charity search to assure an organization is exempt from federal taxation and, if so, determining how much of a contribution is tax deductible; and more.
- Network for Good Web site, at http://www.networkforgood.org/donate/calculator, offers a Giving Calculator where the user can calculate how much of a donation they can afford in relationship to their annual income. The site also provides FAQs about donations and taxes.
Bibliography and Internet Sources
Bentley, Richard J., and Luana Nissan. The Roots of Giving and Serving. Indianapolis: The Indiana University Center on Philanthropy, 1996.
Carnegie Corporation of New York. About Carnegie Corporation. Accessed 07 July 2005. http://www.carnegie.org/sub/about/biography.html.
Kirsch Foundation, History of charitable giving. Accessed 07 July 2005. http://www.kirschfoundation.org/why/history.html.
Merriam Webster Online. Opportunity Cost/Charity. Accessed 05 July 2005. http://www.m-w.com.
O'Connell, B. Civil society: The Underpinnings Of American Democracy. Hanover, NH: University Press of New England, 1999. ISBN: 0-87451-925-x.
Os, G. Doing well and doing good: money, giving, and caring in a free society. Colorado Springs, Co: Navpress, 2001. ISBN: 1-57683-161-2.
Salamon, Lester M., Helmut K. Anheier, and Associates. "The Emerging Sector Revisited." The Johns Hopkins Comparative Nonprofit Sector Project, Phase II, 1999.
Quixtar. Jay Van Andel. Accessed 07 July 2005. No longer available. Alternate site: http://www.alticor.com/people/jay_van_andel.html
W. K. Kellogg Foundation. Will Keith Kellogg. Accessed 07 July 2005. http://www.wkkf.org/default.aspx?tabid=78&NID=68&LanguageID=0.
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