Rational Choice Theory

Rational Choice Theory

• There are a number of approaches to the analysis of the policy
process which draw upon economic theory. Choices that are made
in the competitive market situations and are applied to the
political process. In this sense, individual consider their own
interest that's why the word “rational” is used.
• Rational choice theory states that individuals use rational
calculations to make rational choices and achieve outcomes that
are aligned with their own personal objectives. These results are
also associated with maximizing an individual's self-interest.
Using rational choice theory is expected to result in outcomes that
provide people with the greatest benefit and satisfaction, given
the limited option they have available.
The development of the idea of the
Political Marketplace
• The idea of politics as a marketplace in which leaders
compete for votes is developed in the work of Downs (1957),
who uses economic theory to analyse political behaviour.
• This perspective is based on pluralist theory due to the role of
multiple actors and economic theory due to the economist
reasoning in which self interest is the dominant motive force
in political behaviour.
• In the political marketplace, parties compete to win power by
responding to the demands of pressure groups.
The development of the idea of the
Political Marketplace (continue)
• There is a very strong pressure upon governments to fulfil
those demands, this enhance the role of the state as a giver of
benefits such as governments provide jobs, contracts,
services and tax concessions as well as direct cash benefits.
• In this process, interest groups also seek specific benefits for
themselves like business subsidies, welfare services, etc.
whose costs are paid by taxpayers as a whole. This whole
process involves what is often described as ‘*rent-seeking
behaviour’.
*Rent-seeking Behavior
• A concept in economics and public/rational choice theory
where an individual and entity gain financial benefit from
governments to increase their own wealth without adding any
benefit to the society. for example a company get tariff relief
or subsidy (for that product they produce) from government.
So this company only receive the benefit not the whole
society, as a result inequality enter into the society.
Rational Choice and Collective Action
• Rational choice theory use market mechanisms to settle
collective choice problems. It aims to show that public policy
choices are made like market choices.
• It is argued that policy initiatives developed to deal with the
deficiencies of markets (market failure) as well as the
deficiencies of the state (state failure).
• In this respect, rational choice theory is more concerned
about the way public policy should be made rather than how
it is made.
• Anthony Downs (1957) was the first to apply rational choice theory.
• The rational choice theory stated that individual make rational choices
and decisions that are based on rational information that provide
benefits to the individuals and that are aligned with their
personal beliefs and self interest.
• Three key concepts are used in the discussion of RCT:
a) Externalities
b) Monopoly
c) Market inefficiencies
(a) Externalities
• Externalities arise during market activities, either positive or
negative. Externalities occurs when production and consumption of a
good or service impacts a third party. These externalities affect even
those people who do not participate to those activities.
• Failure to give attention to externalities means that all suffer in the
long run. One of the most obvious example of negative externality is
pollution. Such as during production process, manufacturing
factories releases harmful gases and waste products into the air and
water. Neighbours suffer the consequences of this action. Here, then,
the state intervention is needed to prevent these nuisance objects.
• Failure to deal with negative externalities has been described as *‘the
tragedy of the commons’ .
*Tragedy of Commons as negative
externality
• The tragedy of the commons is an economic theory in which individuals
exploit shared resources as a result it becomes unavailable for the whole. It
impose negative impact.
• A tragedy of the commons occurs when a group of people in a community
use a shared resource for their self-interest, which leads to the destruction of
the resource for the whole community. It is an environmental and economic
problem highlighting the conflict between individual and collective
rationality.
• In tragedy of common, individuals consume a shared recourse, for example
a group of cattle owners who use a common pasture, decides to increase
their number of cattle to maximize profits. Unfortunately, this can lead to
overgrazing and eventually the total destruction of the pasture for everyone.
Free Rider as a Positive Externality
• Positive externalities are not a source of problems. This occurs when
the production or consumption of a good causes a benefits to a third
party. However, the positive externality can be describe as the concept
of ‘free riders’.
• A free rider is a person who benefits from something without
expending effort or paying for it. In other words, free riders are those
who utilize goods without paying for their use. For example, a person
construct a wall along river to protect its land and property from
flooding but this wall also protecting their neighbours property. Thus
other people are the free riders as they are taking benefits from it.
(b)Monopoly
• Monopoly is one of the most common causes. If a single actor
acquires all of the means of production in a market, it will set prices as
they wish because it will face no competition. Often, this company
will set prices much higher than they need because no one else can
compete with them, so their rational decision will be to profit more.
Such as in the supply of water, electricity and gas, transport systems
and large institutions like hospitals and schools.
• Here, these is the need of state intervention. State play a role in
preventing the abuse of monopoly power by preventing exploitation of
rights and providing subsidy to other suppliers.
(c)Market inefficiencies and State interventions

• Thus externalities, incomplete knowledge and monopoly provides a

series of justifications for public policies and state interventions. This
incapacity of public institutions to function efficiently or equitably can
leads to ‘market failure’ sometimes called ‘state failure’,
• Market failure can be caused by a lack of information, monopoly,
public goods, and externalities. Market failures can be corrected
through government intervention, such as new laws or taxes, tariffs,
subsidies, and trade restrictions.