Question

How are the concepts of opportunity cost, diminishing marginal utility, and positive externalities relevant to deciding what charitable cause to donate to?

Answer 1

A person has limited funds to use for charitable purposes, therefore, one will try to choose an alternate which minimises the opportunity cost. So, when we choose the charitable cause, it minimises the cost in terms of welfare reduction associated with foregoing the next best opportunity.

The marginal utility obtained by the chosen activity must be increasing or at least constant and not diminishing. Therefore, we forego a charity which provides diminishing marginal Utility. This is because our aim is to maximise utility with the limited funds.

Lastly, charitable causes which not only have a direct positive effect on the aspects related to the charitable cause but also contribute positively to other aspects which might not have been directly involved in the charitable cause. These charitable causes are said to have a high positive externalities associated with them and thus must be chosen. This amplifies the positive effect of a donation and helps in maximising the welfare for the society.