NPO, NGO, Different Market Forms for Different Situations

NPO is a non profit organization that is either not required to or has some other economic entity or agent cover its fixed costs.

NGO is a non government organization that either is not required to or has another economic entity or agency cover its variable costs.

In many situations the same organization acts as an NPO in one country and as an NGO in another and visa versa.

Analytically both agencies are able to operate and provide services outside the expected level from a perfectly competitive market and expand welfare by their presence in often difficult circumstances.

Non-Profit Organizations (NPO)• Fixed costs are covered by an external agency. Net Welfare Gain is A:B:C:D

Q Perfect Competitor

Demand

MR

ATC with AFC

ATC without AFC

P Monopoly

P PerfectCompetitorP NPO

C Monopoly

MC with FC

Q Monopoly Q NPO Quantity

Price

A

B

C D

Non Government Organizations (NGO)

• Variable costs are covered by an external agency. Net Welfare Gain is A:B:C:D

DemandMR

ATC with AVC

P Monopoly

P PerfectCompetitor

P NGO

C Monopoly

MC with FC

Q MonopolyQ NGO Quantity

Price

A

B

C D

Q Perfect Competitor

ATC without AVC

Analytic Observations• The steeper (more elastic) is the demand curve the greater is the welfare improvement

advantage for an NGO over an NPO and the shallower (less elastic) the lesser is that advantage.

• The NGO improves welfare over the perfect competitor because it is not bound by local input controls for variable costs. Most NGO work with foreign volunteer labor as a prime variable cost component that is not paid

• The NPO is still bound by these costs and will make a welfare improvement to the local economy usually only to the point at which its market price is greater than or equal to the variable costs for a profit maximizing monopoly. The monopolist will usually exercise market power to control input markets if it can and act as a monopsonist which pushes costs down as far as they can possibly be.

• Because governments tend to protect input markets NGO are usually unwelcomed and are active only is cases of drastic events such as war, famine, floods, earthquakes, hurricanes, etc.

• Because businesses tend to jealously guard market sources, NPO operations are usually restricted to areas which are non competitive with the private sector.

• Both NPO and NGO structures are atypical but can have a dramatic impact on local communities and economies.