For most of the twentieth century, positive and normative analyses of the public economic sector have developed starting from simple assumptions about individual behaviour.

Following neoclassical economics, agents have been assumed with stable preferences, selfish enough to satisfy the hypothesis that private resources are used to promote self-interest, that people are endowed with adequate computational skills or at least are able to revise mistakes in decision making through learning and market discipline, and that make expectations which are correct at least in the long run.

This view of a fully rational homo oeconomicus has been increasingly criticised in the last decades by the field of behavioral economics, which lays at the border between economics and psychology and conducts studies that have identified, and in some cases rediscovered, contradictions to classical theory. Many empirical analyses, experimental and from the field, sometimes conducted with other disciplines as in the areas of neuroeconomics and physioeconomics, have shown how easily individuals commit mistakes that are not self-corrected; have indicated that feelings and psychological emotions play a crucial role in determining people economic decisions which don't respond only to purely selfish motivations; have shown that psychological and moral sentiments affect people preferences and welfare, in some cases even their happiness; have challenged the traditional theory of revealed preferences as a basis for welfare analysis.

In addition to criticism, the work on the foundations of economic behaviour has led to more constructive research, including specifically in public economics. The variety of behaviours of individual and groups highlighted by behavioral economics has opened new challenges in the study of the role of the pubic sector in the economy, requiring renewed efforts by economics and other social scientists to understand the motivations and justifications of public intervention, to sharpen the instruments that the public sector can use, and the effects of its decisions.