This document provides an overview of public choice theory. It begins by explaining how public choice theory differs from traditional assumptions about politics and government. Specifically, it notes that public choice theory assumes individuals in government are rational and self-interested, rather than benevolent. It then defines public choice theory and provides examples of key questions it addresses. The document outlines different perspectives within public choice theory and provides real-world examples. It concludes by discussing the importance of government despite its limitations.
1. Public Choice Theory
School of Law, Mumbai University
Thane- Sub campus
-A.Keerthikah
4th Year BBA-LLBA. Keerthikah
2. POINTS WHICH WILL BE COVERED IN
THIS TOPIC
• What we think happens in politics
• What actually happens in politics
• Meaning of Public Choice theory
• Some of the questions related to Public Choice theory
• Schools of Public Choice Theory
• The connection of public choice theory and Law
• Conclusion
• References
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4. • Government is benevolent, politicians works towards the
welfare of the people.
• If the market fails then the government will intervene to
correct it as it has incentive to do so.
• The government knows what to do and it will do it.
• In a state of market failure the next best option is
government intervention.
• The negative externalities such as the problem of pollution
will be controlled by the government.
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6. • People are rational beings who look for their own self-interest. When
it comes to politics, the case is the same. They don’t suddenly
become benevolent, they strive for their own self-interest.
• A failed market is better than a failed government as the
consequences of the former is less disastrous as compared to the
latter. In the past decade, markets have at most polluted the
environment or released some dangerous drug but the government
has caused the death of thousands of people.
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7. • The government may know what to do but if it does not coincide
with its self interest of getting more votes then it won’t take any
measures and instead of solving the problem it might introduce a
new one.
• Taking history into account, it is clear that the market is better off
without government intervention unless and until the market failure
become severe or in the extreme cases of national defence or global
warming.
• In the case of negative externalities, far from controlling it the
government has in times introduced it. In the case of pollution, the
government
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8. Meaning of Public Choice Theory
• Developed by James Buchanan and Tullock, the concept of applying economic theories to analysis the
concepts of politics is the basic idea of public choice theory. It disagrees with the idea that the people
working for the government are public interest oriented or have a benevolent deposition. In simple
words, it mentions that people are the same but the institutions are different so if a person is placed in a
political environment then that person will behave the same as any other person in his place.
• People are self-maximisers even in the field of politics hence they will look after their self-interest instead
of the public welfare. James Buchanan described this theory as “politics without romance” as it gets rid
of our wishful thinking about the government and shows its realist form.
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9. • Public Choice Theory is positive (what is) and not normative(what ought to be). It does
have some normative content but that concerns with the rules that govern the political
activity.
• The theory throws light on the fact that the incentive such as winning elections or
popularity drives the politicians to make a decision.
• The similarities between markets and government is they both can fail and as they both
of consists of people who are driven by their own self-interest. This doesn't make them
greedy, it just means they have their own incentives which drive them.
• The crucial point of this theory is for economists to not imagine a perfect benevolent
government. The famous Nirvana Fallacy comes into play, it emphasis that just because
a solution isn’t perfect doesn’t mean that one should reject it. The market is flawed but
government intervention is not the answer to it as the government might be worse.
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10. • In economics, there is a cost and benefit a person chooses to pay for a product or
service and gets benefitted by it. Similarly in the field of politics, taxpayers pay the cost
but the benefit may or may not be to them. For instance a road is built, that road will be
beneficial to only those people who use it but the cost is been borne by everyone. This
is favourable to the majority and the minorities are exploited.
• This is the kind of injustice that comes into light when an economic analysis of politics
is done. This does not mean that government is selfish or it does not care about people,
they might care about the community but they will pass policies or take steps to try to
increase the motive that they care about like people do. This evidently points us to the
fact that government- legislators, bureaucrats are just like people who are driven by their
personal motives and government is not a perfect system instead it is flawed.
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11. Real life scenarios
• The most valid example of government intervention could be the controlling of drug
prices by the government through the DPCO (Drugs Prices Control Over) 2013.
• The government aimed to control the prices of the drugs which were essential to the
people. But according to surveys instead of price decreased, the price increased about 2
times the earlier price. Comparatively other drugs which were not regulated by DPCO
were more cheaper and the price increase was much lesser.
• In the agriculture sector especially in food grains, the government has become a
monopoly due to its various policies. This has lead to it hoarding rice and wheat which
has caused inefficiency in the market and has affected the competition severely.A. Keerthikah
12. Questions related to Public Choice
Theory
Public Choice theory asks some important questions which are crucial to understand the
political dynamics.
• If the legislators are indeed guided by their own self interest then how can they make policies which will
benefit the public interest?
• How will the people know which candidate’s self interest is akin to theirs so that they can vote for them?
• If the policies are made by looking at the majority, are the minorities always exploited?
• Should government not intervene in the matters of the market?
These are some of the questions which will be answered in this topic.
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13. Public Interest
• The very concept of public interest is flawed as the theory disagrees with the concept of groups or
communities. It instead focuses on individuals as they are the ones who have ideas or interest , a group
has members of conflicting ideas. Hence coming to a collective decision is not possible.
• In this dilemma, Kenneth Arrow had spoken about the impossibility theorem where he states that only a
dictatorship will solve the problem of coming to a particular decision as it will convert a community with
diverse ideas to a single oiled machine. But of course dictatorship is never the solution.
• A new theorem called the “median-voter theorem” by Duncan Black came into the picture. Assuming
that people are well-informed and all the voters have a preferred outcome and there is a majority rule
then this theorem will be successful. Median voter is one whose in the middle of the spectrum. The
spectrum has a left side and a right side, if a proposal is closer to the median voter then that will be
considered rather than other proposals which are in the extreme sides. This will determine the popular
decision among the people.
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14. Real life Scenario
• The best example of median voter spectrum could be the wining of AAP in 2015 elections. In this
theorem, every candidate will like to be in the middle as that’s where the person is going to secure the
maximum votes. In this, the party also has to keep in mind the rival positions and make decisions
accordingly. In this situation not only is the position of the party considered but also his core believes are
taken into account.
• In the 2015 elections in Delhi, there were two major parties AAP and BJP. They both had equal chances
of winning but the core believes of the parties played a major role in deciding the victor.
• The BJP party spoke mainly about Hindus and their superiority, creating an image that were against other
religions. Whereas AAP did neither, they did not showcase themselves as anti-Hindu or anti-Muslim. So
excluding the Hindu ardent, every other voter voted for AAP. It was predicted by applying this theorem
54 per cent for AAP and 32.5 per cent for BJP and the rest were for other third parties. This was exactly
what happened and AAP won the elections.
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15. Votes
• Even though “your vote matters” has been the propaganda during elections, scholars suggest that that’s
not the case. The chances of one vote changing the outcome of elections is so minute, that if it happens
then there are high chances of some foul play and re-elections might take place. This is the case because
the population is large and the votes of the voters are not evenly split. Hence if one analysis the voting
system then it will become increasingly clear that it the cost of voting far exceeds the benefits of it.
• The cost of voting includes studying politics, educating oneself about the candidates or going to the
voting booth far exceeds the benefits as your vote is not even valuable. This makes the whole voting
system an irrational act.
• So if a person wants to vote for a particular candidate because he/she is confident about that person
unless and until a large population of people vote for the same person it is unlikely that that candidate
will be elected.A. Keerthikah
16. • So why do people vote? Most of the people vote because they think its there duty or
due to societal pressure or the feeling of expressing their opinion. Voting is akin to
cheering your favourite cricket team.
• Even though people vote, many of them are ignorant about basic facts related to their
candidates. This is rational as even if there were aware it won’t do them any good. This
is called rational ignorance which was first introduced by Antony Downs.
• It can’t be assumed that every voter is ignorant, the informed voters are essential too.
The Miracle of Aggression suggests that the votes of the ignorant people are cancelled
out by the votes of informed people. For instance if 80 per cent of the voters are
ignorant and they randomly choose any candidate then according to this theory the
votes will be split among the two candidates and the remaining informed individuals
will add their votes hence the person who deserves the most will win.
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17. • The above theory is a miracle as it proves that the vote of the informed matters that .
There is however a major assumption in the above theory, the assumption is that the
voters vote randomly and not systematically. It has also been suggested by various
scholars that in most of the cases the irrational voters influence elections.
• It has also been seen that voters for a large part have been biased, they have
underestimated the economic effect that there request may led to. For instance, the
voters might be afraid of losing their jobs so they might protest to make sure that the
government does not shut down the industries even if it is making a loss. They might
be full aware of the consequences but due to the pressure of the voters they might
have to make irrational choices. Hence rational voters are few in number.
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18. Minorities or Interest Groups
• In a political scenario unlike the market, the choice of the person is not taken into
account. While buying a good or a service a person can easily say no to a certain good
and get the good that he/she wants but in a political situation a person is forced to abide
by the policies made by the legislators. If a person doesn't abide by it then he/she is
punished. This can lead to people getting oppressed by the decisions of the many.
• In this case not only can a majority not exploit a minority, it has been witnessed that the
minority groups team up to get their objectives fulfilled by the government and make
the majorities pay the cost of it.
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19. • This groups mainly known as special interest groups have shared interests
and a strong motive to fulfil it unlike the majority groups which consist of
varied interest and are disorganised.
• These small groups are more active and more likely to voice their opinions.
They might also join with other minority groups to form coalitions to put
more pressure on the people.
• This is most effective when the people have to choose a candidate for the
legislature. As the candidates are more likely to listen to these groups with
strong incentives rather than majorities with weak ones.
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20. • The minority groups also impose their motives on the majority groups
persuading them to join their cause by making the reasons of their motives
applicable to them as well.
• This leads to the minority group getting what they want and the burden of
the cost falls on the majority group.
• The government will create externalities instead of reducing it so that the
minority groups are benefited while the majority group will be pay the price
in the form of taxes.
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21. • Minority groups objectives are most fulfilled by the government as they too have their
self interest and these groups spread their interest effectively by conducting debates or
protesting. Thus for fulfilling their demands the government will increase the taxes or
put restrictions over the majority.
• This is dangerous in the long run as it effects the majority of the taxpayers and the
coalitions practice of influencing the governmental officials to act the way that is
beneficial to them might affect the whole economy of a country.
• This is also used by the politicians to secure more votes where the minority group try to
attain their interests is by vote-trading or logrolling. In this method, the minority group
makes a deal with another group by mutually agreeing to help each other attain their
desired goals. For instance, one group’s goal is to improve the water supply in one
locality they will make a deal with the other group to vote for them in return they will
improve water supply in their locality too. This is known as explicit logrolling.
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22. • In implicit logrolling, various groups combine their manifestos to form one proposal and the
people who feel strongly about any objective in the proposal tend to vote for that person by
automatically agreeing to others.
• Logrolling has some positive and negative effects. The positive effects are that the objectives
which the minority groups have strong incentives about is achieved through vote-trading. The
negative effects are people are made to pay for projects which might not benefit them at all.
Projects whose benefits are not equal or more than to the cost are agreed in this manner which
is wasteful and irrational.
• Another major problem of interest groups is rent-seeking. This happens when the group’s
incentives if attained will benefit the group but pose a economical loss to the whole country.
Simply put, it is a case when you earn the benefits but you don’t pay anything back.
• Hence it is important that the people in the majority group carefully understand the agendas of
the minority group and analysis the consequences of it and not follow it blindly.
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23. Real life scenarios
• India being a diverse country has faced the problems of interest group quite often. The
protest by Gujjar communities in Rajasthan demanding reservations is a important
example of interest groups.
• The gujjar communities used violent methods to get the 5 per cent reservations that
wanted but the end result remains that it is going affect the community. Reservations
have always been debated in our country, few calling it the downfall of our country.
• The benefit if the reservations will also be less as it is always thousands of people
competing for a few seats.
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24. Government
• Even though it has been evidenced that government consists of people motivated by
their own self-interest. The role that a government plays cannot be played by a market.
• Public goods are goods which are enjoyed by everyone but few pay for it, this is also
called the free-rider problem. They consist of cleaning the pollution or building
hospitals or a park. The market cannot or does not help in providing these goods and
hence we need the government to produce them.
• Bunchanan and Tullock regard government as “means by which rational, self-interested
individuals combine to promote their personal interests through collective action.”
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25. • The reason we need the government is because even though government is not that
reliable but without it there will be anarchy. In a state of anarchy the conditions will be
far worse as the weak will be exploited by the powerful.
• The people in power will live in fear of hostility. They could instead prefer a peaceful
environment. This is the reason why the government is indeed important.
• The individual live by agreeing to countless number of agreements to live peacefully.
• In the book “The Calculus of Consent” written by Tullock and Bunchanan, they cite
the above mentioned reasons for the importance of government.
• As mentioned in earlier slides, the government cannot be romanticised to show it as an
ideal places with people like angels who work only for the public. If all men were angels
then there could not be a need for a government.
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26. • The bureaucrats are also people driven with their own self-interest and their motive is to
keep on producing goods for budget-maximization. The more funding leads to more
administration decision, more prestige and increased possibility of promotion.
• So they produce more goods to the point where it is not useful as there incentive is not
cost but budget-maximization.
• One of the major point of public choice theory is that even if you change the people
working in a government that doesn't necessarily mean that the government will be
better. It’s not the people but the institutions, as people are rational beings who look
after their self-interest.
• Hence it can be concluded that we need the government as the number of choices
made by the government is too high and the difference of opinions among the people
make it impossible for us to vote on every issue.
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27. Schools of Public Choice Theory
• Virginia School of Public Choice – by Bunchanan and Tullock
• Rochester School – by William H. Riker and Kenneth Shepsle
• Chicago School - by George Stigler
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28. Virginia School of Public Choice
• It was founded by James Bunchanam who is regarded as the Father of Public Choice,
he received a Nobel prize for his contributions. This school was co-founded by Tullock
whose part in public choice theory is indeed commendable.
• This school focus on the real world politics and the relation between public choice and
constitution.
• This school has done a major part in discovering various theories under public choice
theory. Few of them have already been discussed. The crucial part of this school is the
emphasis that it put on role of the constitution.
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29. • Tullock and Bunchanan state that the people are not vulnerable to be exploited by the
interest group or the politicians as they can take the cover of the constitution to protect
themselves and secure their themselves from being exploited.
• They see constitution as a set of agreements formed by an individual by agreement with
an another individual. The order by the courts form to be part of it and every law is
passed by a rational person. The people have accepted it as even though it might curb
some of their wishes, people are still content on following it.
• The problem in it is as said by James is to come to a collective decision which is agreed
by all. James and Tullock have developed a two-stage process, people should agree on
the areas where collective decision is needed and then set a precedent for how the
decisions in the future will be made. After deciding how the decisions will be made will
the decision of what to do will be decided.
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30. • This is based on the theory that no person will make decisions which will harm them in
the future.
• They believe that informed majority people should place votes to make sure that the
minority are not exploited.
• A constitution is made by a rational individual hence that person will place considerable
amount of limits on the politicians and bureaucrats to limit their power so that they
cannot exploit the people.
• James Buchanan emphasis on his idea of fiscal constitution that there should be a
control on the tax policy and any rational person will make the constitution in such a way
that any of the groups-major or minor is not exploited as that person might belong to a
majority group now but in few years that might change and a rational person will know
this and hence act accordingly.
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31. • James believes that this will stop the people from favouring their own group.
• This school puts special importance on federalism and localisim. It talks about the fact
that to limit power in a few hands, one can just divide it.
• In this case, it will be easier to take decisions in smaller groups instead of larger ones
and in smaller groups people will share more similar taste and opinions. Hence it will be
easier to make some decisions locally.
• There is another advantage to this method, if a person doesn't agree with decisions of
one place then he/she can simply move to an another place.
• Federalism also permits laws or regulations to be made which are better suited to one
region.
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32. • This theory was regretted by the critics who argued that constitutions are not made by
the unanimous consent of the people. Some citizens have been following the
constitution which had been drafted by people who were of minority groups for their
benefit. Some have been following constitution which have olden rules and they have
no say in the matter.
• The main drawback of this theory is that parliament is sovereign and the constitution
does not restrain its taxation powers.
• Even with these drawbacks, this school has brought a major change in the theory of
public policy as it has made economists aware that they can’t design policies without
speaking to the people and even then it might be one person loss and another person’s
gain. The policy can be beneficial only if it is agreed by all.
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33. Rochester School
• William Riker played a major part in developing Rochester School, he focused on the
interest group forming coalitions to better its chances against the majority. He realised
that coalitions do not last for a long time as it is difficult to maintain the group.
• He came to a conclusion that best plan for a minority group could be to form a group
with enough members to win but not too large that it becomes difficult to manage. He
coined this strategy as minimum winning coalition.
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34. • William Ricker also brought in the game theory to better understand the voting mentality
of the voters.
• Game theory talks about the choices that one makes keeping in mind the actions of
others. The prisoner's dilemma is one of the best examples of game theory.
• In this scenario there are two prisoners, each one of them is kept in a separate room and
they are given three options. Fearing that the other person will throw him under the bus,
both of them confess to their crimes.
• This same scenario is compared to a voting system, where people will try to guess the
choice of the other voters to vote so that the person they dislike is not chosen or the
person they like is more likely to be elected.
• By knowing this, we can decode the real choice of the voter and a candidate will be
elected who suits the public to prevent manipulation by minority groups.
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35. Chicago School
• This school focus more on the pure economics i.e. the logical aspect of economics. It
takes the basic concept of supply and demand and uses them to analysis the political
situation.
• It talks about the need to make a collective decision which can be the price which keeps
the need of the government who are suppliers and hence laws are the demand by the
people which are fulfilled by the supply of the government.
• George Stigler was the frontier in the Chicago school, he spoke about the interest
groups. He emphasised that it won’t be long before the government starts to work for
the interest of this minority special interest groups rather than the public interest.
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36. • The special interest groups with their strong incentives will manipulate the politicians who will in
turn set up regulations and restrictions for their benefit.
• He further spoke about the government setting up agencies to specifically support the interest of
these groups.
• In the regard of politicians winning more votes, the politicians have to be brokers between the
groups who lobby the government for their own benefit and the taxpayers who in turn pay it.
• They may get benefited in the votes that they get which can be called as their brokerage fees and
if they are successful in winning the elections then they can be rewarded in terms of cash or
status, public attention etc.
• They may even get favours from the groups that they benefited in terms of cash or some other
bargain.A. Keerthikah
37. • The criticism of this school is that it simplifies factors which are not so simple. It changes
complex situations by analysing it with basic economics.
• Even though buying of votes or people like in a marketplace is true in economics, similar
terms can not be used while speaking about politics as it could horrify the people. This is
an abstract comparison and can’t be taken literally, the problem arises when people do.
• Still this school has helped in deeper understanding of the principles of Public Choice
Theory.
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38. Law and Public Choice Theory
• Professor Daniel A. Farber and Philip P. Frickey analyzed the relation of law and public choice
theory in their book “Law and Public Choice: A Critical Introduction”.
• They adopted a wait and see response to public choice theory. There approach is based on the
fact that a unplanned reaction to a threat even of large magnitude might lead to even higher cost
for the society.
• The professors do not agree with the fact that changes should be made in the government due
to the results of the analysis of public choice theory. Instead they want to wait and confirm the
findings of this theory as it might lead to some concreate applications with promising results in
the future.
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39. • The professors agree with the popular view of the public choice theory that the
politicians have their won interest which mostly means getting more votes. This
incentive drives them to make decisions which are popular with the public so that they
may still be in power in the re-election.
• A legislator on the other hand, has to make sure that his/her constituents (people who
vote their representative to represent their interest) wishes are being heard and hence
will act accordingly. She/He will vote according to the majority decision of his/her
constituents. But this view goes with the assumption that the constituents (a registered
voter) will be rational i.e. he/she will vote according to his/her self interest. This is not
the case as most of the voters act irrationally i.e. against their own self-interest. The
truly rational person will never even vote as he/she knows that his vote doesn’t count.
According to the professors, people vote because of their sense of duty towards their
country.
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40. • The professors further spoke about their views on the Arrow’s Theorem which states
that political results does not reflect the popular preferences of the voters instead their
views get destroyed through strategic behaviour and manipulation.
• They disagreed with the statement in this theorem that democracy was a black box with
strict majority rule instead they believed that democracy takes the public views and
processes it through the public institutions to give the people the best decisions.
• Even though they agree that rent-seeking behaviour is harmful to the economy. They
believe that it won’t manipulate political outcomes as in many cases majority voter’s
choices prevail over the minority groups.
• They further emphasis the government’s role is not restricted to economy as they have
various other factors to look after like equality among people or equal distribution of
income.
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41. • The professors give remedies to stop the power of interest groups by bringing in the
Congress. They talk about using the power of the Congress for limiting the power of the
interest groups by putting restrictions.
• Concluding their analysis, they emphasised the use of public choice in the interpretation
of statues to better understand the influence it will have among the people and to
understand whether the people who will be affected by the statue have proper
representation in the legislature.
• Hence they believe that though public choice theory is a good concept it still has a long
way to go before one can take any changes in the government.
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42. Conclusion
• Public Choice theory has indeed done a remarkable job by applying basic economics to
the working of politics to show the political scenario in the most realest form.
• It breaks the very foundation of the early thinkers that a market failure will guarantee a
government intervention and hence all will be saved. It exposes the working of our
political system to show the people how vulnerable and prone to failure the
government actually is.
• Even though political choice theory opens newer grounds that haven’t been explored it
still leaves us with a few questions.
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43. • Do people really think about their economic interest ? Do they even know or care about
the political situation? It has been seen that people blindly follow leaders who are
corrupt.
• It is even saddening to know that the judiciary particularly in India has sided with the
majority rule in the country. So it is evident that constitution can not do any action to
limit the power of the politicians.
• Hence, there are more questions to be answered by future theorists and even after these
criticisms, this theory is still held to be a important one which has dig deeper into the
political dynamics to analyse it further.
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