ABSTRACT
Defining charitable in the popular sense of poverty relief is countered by examples of symphonies and prep schools; broadening the exemption to cover the relief of any government burden overlooks the separation of church and state; and the search for a concrete sense of community benefit fails to keep the exemption within administrable bounds. A stimulating body of economic and political theory has emerged over the past decade attempting to explain why the United States has such a large "third sector" as an alternative to proprietary firms and the government. Economists theorize that donative organizations exist to facilitate the production of certain "public goods" (which can be either products or services). Confirmation of the relationship between government failure and donative behavior comes from observing whether rapid drops in donative activity follow sharp increases in government spending. Government failure combined with private market failure provides the most rigorous case for explaining why donative nonprofits exist and what function they serve.
