ON THE EMERGENCE OF NON-PROFIT FIRMS AS ALTERNATIVES TO THE GOVERNMENT

It is well known that many non-profit firms coexist with government firms in industries that provide collectively consumed goods and services, such as education, healthcare, social services, and art and culture. This paper explores the specific circumstances under which non-profit firms can emerge as alternatives to the government. We show that a non-profit firm emerges only when the residents' median preference for a collective good is significantly low. This finding implies that, somewhat paradoxically, a non-profit firm emerges to replace the government and provide a collective good only when the majority of residents consider the good non-essential.