Chapter 8: STATE AND
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
Public choice approach studies an organization by studying
behavior of a representative individual. Such an individual
typifies behavior of people in that organization.
- Methodological individualism: In
organizations individuals should be basis of analysis.
Both as basic units of decision making and unit for whom
decisions are made.
- 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.
- People want maximum utilization.
- Individuals act rationally with adequate information and
- Public expenditure grew leading to high tax and
- Fiscal crisis of welfare state in most states.
- Collapse of soviet union.
- High growth in open countries like Japan.
- Dismal performance of PSU's.
- 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.
- The above factors led to liberalization, privatization
and globalization which meant government had to intervene
but be market friendly.
- Government would put checks and balances on markets.
- Intervention to be after rules and regulations.
- Problems with markets are they don't ensure equity,
equilibrium between demand and supply, optimum allocation
of resources and imperfections in markets of developing
Government's core function in economy:
- Establish foundation in law. Augment demand.
- Maintain macro-economic stability. Share risks of
- Invest in basic social services and infrastructure.
- Protect vulnerable and environment.
- To provide legal, regulatory framework to markets.
- Catalyze private sector supplies and new market sectors.