Public choice approach argued for "institutional pluralism" in provisioning of public goods and services to promote consumer preference. It wanted curbing various functions of government and reducing its role and transferring functions to the market. They wanted government to play a "enabling role", facilitate and promote change in society and distribute the public benefit. Thus focus on "market as a regulator".

Due to WWII, great Depression, Russian revolution the market mechanisms failed and Keynesian methods of huge investment by state to accelerate socio - development was needed. Public choice approach reduces dependence on a single power center and believes in institutional pluralism in provision of goods and services.

Public choice approach studies an organization by studying behavior of a representative individual. Such an individual typifies behavior of people in that organization.
  1. Methodological individualism: In organizations individuals should be basis of analysis. Both as basic units of decision making and unit for whom decisions are made.
  2. Economic methodology: Rational choice is most important as people rank alternatives available and choose most preferred.

So it prefers policies that promote voluntary exchange involving consent than coercion i.e. market economy. Pareto optimality is achieved due to perfect competition. Markets are competitive and people compete to provide services and gain services.

  1. People want maximum utilization.
  2. Individuals act rationally with adequate information and ordered preferences.


  1. Public expenditure grew leading to high tax and inflation.
  2. Fiscal crisis of welfare state in most states.
  3. Collapse of soviet union.
  4. High growth in open countries like Japan.
  5. Dismal performance of PSU's.
  6. Excess state intervention led to skewed performance, market distortions, corruption, inflated bureaucracy.

Globalization creates instability and insecurity and so coordination between state, market and civil society is needed to counter this.


  1. The above factors led to liberalization, privatization and globalization which meant government had to intervene but be market friendly.
  2. Government would put checks and balances on markets.
  3. Intervention to be after rules and regulations.
  4. Problems with markets are they don't ensure equity, equilibrium between demand and supply, optimum allocation of resources and imperfections in markets of developing countries.

Government's core function in economy:

  1. Establish foundation in law. Augment demand.
  2. Maintain macro-economic stability. Share risks of market.
  3. Invest in basic social services and infrastructure.
  4. Protect vulnerable and environment.
  5. To provide legal, regulatory framework to markets.
  6. Catalyze private sector supplies and new market sectors.