Key Concepts and Terms

• Historical background. In 1963, James Buchanan and Gordon Tullock invited selected economists and social scientists to explore non-market decisionmaking, culminating in a conference and subsequent Public Administration Review Article (Ostrom, V., 1964). Collaboration among these scholars led to the founding of the Public Choice Society in 1967 and the publication of its journal, Public Choice, starting in 1968.

• Public goods vs. private goods. Public goods are indivisible (not in discrete units) goods and services distributed under non-competitive market conditions to consumers who, as individuals, cannot easily be excluded from enjoyment of the benefits (ex., roads). Private goods, in contrast, are goods and services which can be allotted in discrete units and distributed under competitive market conditions to consumers based on ability to pay (ex., automobiles).
  • Externalities. Public and private goods form a continuum, not a dichotomy. In between are goods and services which spill over into the other sector in positive or negative directions. Air pollution produced by a paper mill is a public good illustrative of a negative externality. Improved quality of life provided by a public park is a public good which illustrates a positive externality for the nearby real estate market.

  • Public goods and free riders. Public goods such as national defense benefit all consumers within the jurisdiction of the country, regardless of the amount (if any) they pay for it in the form of taxes. A self-interested, rational, benefit-maximizing individual cannot purchase more of the public good than already received and has no incentive to try to do so. Rational individuals also have no incentive to conserve public goods held in common (hence the "tragedy of the commons" described by Hardin [1968], in which benefit-maximizing rational individuals intensively graze their own sheep in the common pasture, harming it and leaving everyone worse off).

  • Implications for voluntary action. The logic of public goods and free ridership undermines voluntary collective action. Olson (1965) argued that the success of public voluntary groups depends on their offering members separable individual benefits in addition to the public interest (ex., the AARP offers insurance, retirement planning, and other individual benefits in addition to supporting advocacy for the elderly).

• Constitutional choice. In a system of public choice it is necessary to agree on rules for making collective decisions (ex., deciding on roads, natiional defense, education, and other public goods). Buchanan and Tullock (1965), leaders in public choice theory, note that in deciding on such rules individuals take into account two types of cost: (1) external costs (actual costs the individual will bear in the form of taxes, fees, time, the ratio of positive to negative benefits, and other resources) and (2) decision-making costs (time, effort, and other resources consumed by participating in the decision). External costs go up as one goes from a rule of unanimous consent (everyone agrees only if everyone benefits) to a rule of authoritative decision by a single decision-maker (maximum possibility of external costsfor citizens at large). Decision-making costs go down, however, as one goes from a rule of unanimity to a rule of individual decision. Rational individuals deciding on a constitutional rule will pick a point in the middle where opportunity costs of decision-making will equal external costs. This point will vary by decision. For a responding-to-terrorism decision or other decisions requiring rapid response, the point may be closer to authoritative decision-making by one for the collective, whereas in other matters the point may favor majority rule or even unanimity.

• 'Economic man' and bureaucracy. Tullock (1965) developed a model of the civil servant as an 'economic man' motivated by the goal of career-advancement. Career advancement is best served by pleasing one's superiors. Pleasing superiors creates an incentive to forward favorable information up the chain of command and to suppress unfavorable information. This distortion of information accounts for the error-prone nature of large bureaucracies. Superiors may respond by tightening controls, but this only creates more incentives for distortion. This argues that there are limits to economies of scale as bureaucratic size increases, a point absent from Weberian and earlier theories of bureaucracy. Likewise, this argues that distortion may be minimized not by tight control but by institutional constraints on the authority of superiors, another point absent from earlier theories.

• Voting rules and bureacracy. Public choice theorists have also been concerned with the logic of voting as a means of expressing individual preferences. If the distribution of preferences in a given policy area is single-peaked (ex., a normal curve), then the most popular policy position will be the median one (Black, 1958). Majority voting reflects collective preferences under conditions of single-peakedness since most preferences cluster around the median. However, when preferences are bipolar or multi-peaked, majority voting may not reflect collective preferences. With bipolar preferences, the most popular policy position is the larger of the two peaks, but fewer than half the individual preferences may cluster around it.

  Since public agencies deal with different policies having different preference distributions, therefore different agencies will require different constitutional choice and voting rules. No single form of agency organization will fit all policy areas. More broadly, Ostrom and Ostrom (1971: 211) suggest that a self-interested, rational, benefit-maximizing individual would expect to get better results from the public sector under a system of constitutional rules allowing access to a number of different agencies capable of providing public services in response to a diversity of communities of interest. This implies a rejection of unitary theories of bureacracy (ex., Weber, Wilson) in favor of a new theory of public administration based on public choice theory.

  • Market vs. hierarchical organization. Following the logic above, Ostrom and Ostrom (1971) argue that in many domains (ex., police, education, water) public services may be better offered through multiple independent agencies rather than through a unitary integrated agency. They write, "A combination of user taxes, service charges, intergovernmental transfers of funds, and voucher systems may evoke some if the characteristics of market arrangements among public service agencies" (p. 212). The role of agency heads under such quasi-market conditions is to mobilize clients and bargain with other governmental bodies. Coordination is achieved by these multiorganizational arrangements rather than through integrated bureaucratic hierarchy. Public choice theory is in this way similar to themes developed by the "new public administration" and "reinventing government" movements of the 1990s, though these movements went further by promoting public-private partnering, outsourcing, and privatization as means to greater 'marketization" of public goods than had been advocated by early public choice theorists.

Assumptions

• Individualism. Ostrom & Ostrom (1971: 205) note, "Work in public choice begins with methodological individualism where the perspective of a representative individual is used for analytical purposes. Since the individual is the basic unit of analysis, the assumptions made about individual behavior become critical in building a coherent theory." The Ostroms cite four public choice assumptions about individuals:
  1. Self-interest: Individuals are assumed to be motivated by self-interest, which, unlike selfishness, can be perceived in short or long term and in personal or collective aspects differing by individual.
  2. Rationality: Individuals are assumed to be rational, preferring superior alternatives to inferior ones. If A is preferred over B, and B is preferred over C, then A will be preferred over C.
  3. Benefit-maximizing: Individuals adopt strategies to maximize benefits of their choices. Strategies may include consistent choice of alternatives thought most beneficial in the past.
  4. Uncertainty-minimizing: Individuals adopt strategies to reduce the uncertainty of outcomes of their choices. Strrategies may include obtaining more information about more alternatives.

Illustrative Hypotheses

• Behavior in organizations can be described in terms of rational, self-interested individuals who seek to maximize benefits.
  • Benefit maximization will be associated with uncertainty-minimization.

• Individuals will tend to exploit public goods for individual benefit, even if this lowers average benefit for all (even the individual in the long run).

• Individuals and groups will tend to maximize benefits by transferring the costs of negative externalities to the public.

• Individuals and groups will tend to maximize benefits by seeking to appropriate positive externalities of public goods.

• The more a voluntary group provides separable individual benefits, the more successful it will be in membership terms.

• The higher the time, effort, resource, and other costs of participating in decisions on public goods, the less the participation.

• Decisions of individual bureaucrats can be predicted on the basis of career advancement interests.
  • Career advancement motivation will be correlated with withholding negative information from superiors.

• Offering public services through multiple agencies rather than though a unitary agency will be associated with higher user satisfaction.

• Offering public services through markets rather than though a unitary agency will be associated with higher user satisfaction.

Frequently Asked Questions

• What is a good source for public choice theory?
  The Public Choice Society was founded in 1967 by Gordon Tullock and others, It has published the journal, Public Choice since 1968.

Bibliography

• Black, Duncan (1958). The theory of committees and elections. Cambridge, UK: Cambridge University Press.
• Buchanan, James M. & Tullock, Gordon (1965). The calculus of consent: Logical foundations of constitutional democracy. Ann Arbor, MI: University of Michigan Press.
• Hardin, Garrett (1968). The tragedy of the commons. Science 162: 1243-1248.
• Olson, Mancur (1965). The logic of collective action. Cambridge, MA: Harvard University Press.
• Ostrom, V. (1964). Developments in the 'no-name' fields of public administration. Public Administration Review 24(1):62-63.
• Ostrom, Vincent and Ostrom, Elinor (1971). Public choice: A different approach to the study of public administration. Public Administration Review 31(2): 203-216.
• Tullock, Gordon (1965). The politics of bureaucracy. Washington, DC: Public Affairs Press.