The Research Cell in association with students from South Asian Students for Liberty, IIT Madras, organized a lecture as part of the Freedom Friday lecture series. The interactive talk was led by Mr. Kumar Anand, director of advocacy at the Center for Civil Society.
Beginning with a short introduction, public goods are non-rivalrous and non-excludable and lead to market failures, given their nature. Traditional theory suggests that people choose public goods in ways different than when choosing private goods. But in actuality, that is not the case. Even for public goods, all players are interested in maximizing their utility and economizing the cost.
Intrinsic to this thinking is the three I's: Interest, information, and incentives. The various players in this game of choosing public goods are the voters, politicians, consumers, bureaucrats, and businesses. An individual can wear many of these hats at any point in his life.
This leads to the question of how players maximize their self-interest. All players have their own goals which can be broadly captured by the availability of public good, prestige, power and personal benefits. This is the foundation for the role of incentives in public choice.
Incentives come in different forms: rational ignorance, concentrated benefits with dispersed costs, costs of organizing and rent-seeking behavior. Everything we experience and see in public spheres of our life can be seen as an incentive, whether it is political parties wooing voters or building grand structures or harnessing the potential of crowds, they all act as incentives in public choice.
The last block in public choice is information. It is through information that we realize that the government, which is responsible for the provision of public goods, is imperfect. Thus, there is a need for citizens to be skeptical of their intentions. This can be seen as a principal-agent problem, where we, the citizens are the principal and government is the agent. There must always be an accountable agent.
In a democracy, this is usually accommodated through lawmaking and putting caution to mandate. The mandate should be given only when the agent has shown good results on small problems, with the magnitude of problems slowly being increased. On the other hand, laws should be made in a way that they are accountable, clear and transparent. A sensible system of checks and balances can act as the invisible hand in the political market. This would automatically maximize the self-interest of the various players.
Thus, in conclusion, the government cannot be expected to be the answer to avoiding market failure, they can cause failures themselves. Their work should be evaluated with skepticism, because of the various nexus that exist between certain players and government. Government intervention is not necessarily the most efficient outcome in public choice.