Public Choice Theory

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Blog Author :

Aswathi Jayachandran

Edited by :

Raisa Ali

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is Public Choice Theory?

The public choice theory uses economic theory methods to investigate issues usually addressed by political scientists. It tries to examine governance issues based on the premise that voters like elected officials and bureaucrats, act to enhance their interests and not always maximize the welfare of society.

What Is Public Choice Theory

The theory applies the same principles that economists use to analyze consumer behavior in the marketplace to the collective group decision-making of government officials. According to economists who study behavior, the primary motivation behind people's activities in the marketplace is a concern for their interests. As a result, they make choices that serve them the best. The theory hence works around that idea.

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  • The public choice theory applies economic principles used to study people's actions in the marketplace to collective decision-making processes.
  • James Buchanan, a libertarian economist, introduced public choice theory in his book "The Calculus of Consent." He emphasized that humans are self-interested actors, whether engaged in political or commercial activities.
  • Buchanan described the public choice as "politics without romance," highlighting that individuals are motivated by self-interest when voting or making economic transactions. Bureaucrats and politicians also make choices based on their interests.

Public Choice Theory in Economics Explained

The public choice theory applies the same ideas that economists use to study people's actions in the marketplace to people's actions in collective decision-making. Libertarian economist James Buchanan first introduced the public choice theory in the book "The Calculus of Consent," his landmark work. He co-authored it with Gordon Tullock in 1964. Buchanan put forth an intriguing contrast between the two tiers of public choice.

The first level is when a country's founding members draft and adopt its constitution. The second level, the post-constitutional level, is where citizens attempt to influence policy, politicians compete for votes, and bureaucrats attempt to remain loyal to the ruling party. According to Buchanan, the first level is comparable to establishing a game's rules. In contrast, the second level is comparable to participating in the game according to the rules laid down. 

Public choice, according to Buchanan, is "politics without romance." He claimed that people are motivated by self-interest when voting, just as when purchasing products and services. People vote based on what's best for their finances. These are not just the cases of elected representatives or politicians but also the bureaucracy, which consists of civil servants and other public servants, which also seeks to maximize benefits and act in a consumer-like manner.

However, there is a distinction between politics and economics regarding the core of self-interest. According to economic theory, a consumer experiences both the cost and the benefit of an economic decision. Examples include buying a desired product or paying for a meal in a restaurant etc. Contrarily, in public choices, the people who reap benefits provided by the government may not always bear the costs (taxpayers).

Characteristics

The public choice theory challenges the hegemony of bureaucracy and opposes the hierarchical government. The following are some of the characteristics of political choice theory:

  • Individual Decision Unit: Public choice theory views individuals as the basic decision-making unit. It analyzes collective decisions by aggregating the choices made by individuals.
  • Market Analysis: The theory applies economic concepts and tools, including market analysis, to studying political systems. It views political processes as a form of exchange and interaction among individuals.
  • Self-Interest: Public choice theory emphasizes that individuals within a political system act in self-interest, similar to how they behave in economic markets. It recognizes that people pursue their preferences and maximize their well-being when making political decisions.
  • Critique of Bureaucracy: Public choice theory often critiques the bureaucratic governance model and challenges the notion of hierarchical government. It highlights potential inefficiencies, rent-seeking behavior, and the lack of incentives for bureaucrats to act in the best interest of society.
  • The Plurality of Government and Public Agencies: The theory suggests that consumer preferences shape the plurality of government and public agencies. It recognizes that the preferences and choices of individuals influence the composition and functioning of political institutions.
  • Economic Logic in Public Service Distribution: Public choice theory applies economic logic to address issues related to the distribution of public services. It examines how incentives, market mechanisms, and competition can improve the efficiency and effectiveness of public service delivery.

Examples

Let's look into some examples to understand the concept better:

Example #1

Suppose Dan, a government official, pushes for a land takeover by a mining company. The company is one of his friends, and he convinced Dan that approving the proposal would create jobs and push economic activity around the place. Thinking about it, he could help his friend and provide employment opportunities to people around that area. However, acting on it would have other negative implications.

There could be an environmental disaster; there could be deforestation, and it could add to the existing carbon emissions. In addition, this move may permanently displace people in the surrounding area who may be native to that place. Here, the official pushes an agenda based on self-interest that could do good for a fraction of the community by overlooking the bigger picture.

Example #2

People opposed the Patient Protection and Affordable Care Act, also known as Obama Care. It was a policy intended to provide health insurance for uninsured people. The government desired to provide healthcare services to the uninsured, who would benefit greatly from it.

However, there was opposition from people who already had insurance coverage. They opposed it because they feared losing what they had or being taxed more. Here, this can be taken as an example of public choice theory in public policy as a section of people acted against the goodwill of society as a whole for their interests.

Advantages And Disadvantages 

Here are the main advantages and disadvantages of this theory:

#1 - Advantages

  • Public choice theory applies economic theory and methodologies to analyze political behavior, providing a framework for understanding the motivations and incentives of individuals in collective decision-making.
  • It offers insights into how self-interest and individual preferences influence political choices, helping to explain and predict the behavior of voters, elected officials, and bureaucrats.

#2 - Disadvantages

  • In the context of public goods, public choice theory acknowledges that individual incentives may not always lead to socially optimal outcomes. Non-excludable and non-exhaustible resources, considered public goods, can suffer from underproduction because individuals are incentivized to "free ride" and avoid investing in their production.
  • This underproduction of public goods can be seen as a limitation or disadvantage of public choice theory in certain social contexts.

Frequently Asked Questions (FAQs)

1. What is the difference between rational choice theory and public choice theory?

According to the rational choice theory, people make decisions based on what will benefit them the most. People consider their options and select the one they believe will benefit them. Political choice theory talks about how certain people act in their self-interest against the general public.

2. How can public choice theory affect government intervention?

The theory argues that voters, legislators, bureaucrats, and people in the public sector are said to make decisions that maximize their utility. These decisions often opt for policies to be designed that suit them or disregard the majority's opinion or welfare.

3. What is public choice theory vs. public interest theory?

The key difference between public choice theory and public interest theory lies in their underlying assumptions about individual motivations and the nature of political decision-making. The public choice theory posits that individuals, including policymakers, are driven by self-interest and seek to maximize their benefits. In contrast, public interest theory assumes that government officials act in the public's best interest and prioritize the welfare of society as a whole.