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Choices in The Public Sector

24 April, 2015 - 11:52

Learning Objectives

  • Compare public interest theory and public choice theory.
  • Use public choice theory to explain rational abstention and why legislative choices may serve special interests.

How are choices made in the public sector? This section examines two perspectives on public sector choice. The first is driven by our examination of market failure. Choices in the public sector are a matter of locating problems of market failure, determining the efficient solution, and finding ways to achieve it. This approach, called the public interest theory of government, assumes that the goal of government is to seek an efficient allocation of resources.

An alternative approach treats public sector choices like private sector choices. The body of economic thought based on the assumption that individuals involved in public sector choices make those choices to maximize their own utility is called public choice theory. Public choice theory argues that individuals in the public sector make choices that maximize their utility—whether as voters, politicians, or bureaucrats, people seek solutions consistent with their self-interest. People who operate business firms may try to influence public sector choices to increase the profits of their firms. The effort to influence public choices to advance one’s own self-interest is called rent-seeking behavior.