Explain why charitable giving is Pareto superior move. Is there an economic explanation of why the supply of charity might be sub-optimal? Explain
What will be an ideal response?
Charitable giving is a Pareto superior move, almost by definition. This is because both givers and recipients of charity must be better off from the exchange (at least ex ante) in order for the exchange to happen. A possible economic explanation of why the level of charity produced through voluntary exchange might be sub-optimal is because charity has some characteristics of a collective consumption good. Knowing that other individuals give to charity gives me enough utility that I can free ride on the donations of others. Because of the incentives to free ride on the charity of others, charity could be underprovided.
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