Public-Choice Theory

Economists focus most of their analysis on the workings of the marketplace. But serious
economists have also pondered the government’s role in society. Joseph Schumpeter pioneered
public-choice theory in Capitalism, Socialism, and Democracy (1942), and Kenneth Arrow’s
Nobel Prize –winning study on social choice brought rigor to this field.

Governments can make bad decisions or carry out good ideas badly. Indeed, just as there are
market failures such as monopoly and pollution, so are there “government failures” in which
government interventions lead to waste or redistribute income in an undesirable fashion.

These issues are the domain of public-choice theory, which is the branch of economics and
political science that studies the way that governments make decisions. Public-choice theory
examines the way different voting mechanisms can function and shows that there are no ideal
mechanisms to sum up individual preferences into social choices. This approach also analyzes
government failures, which arise when state actions fail to improve economic efficiency or when
the government redistributes income unfairly. Public-choice theory points to issues such as the
short time horizons of elected representatives, the lack of a hard budget constraint, and the role
of money in financing elections as sources of government failures. A careful study of
government failures is crucial for understanding the limitations of government and ensuring that
government programs are not excessively intrusive or wasteful.

[Sourced From:
- Samuelson – Economics
- Musgrave, & Musgrave Public Finance in Theory and Practice]

Class Notes, Public Finance – Arun Keshav