Objectives of Public Finance

Allocation of Resources Promotion of Distributional Justice Removal of Distortions in the Economy Capital Formation and Economic

Growth

Allocation of Resources

The govts attempt to achieve the goals of their economic policy through annual budget.

Brings out adjustments in the allocation of resources between different sectors of the economy for the production of various goods and services.

To satisfy collective and individual wants and the proportion of goods to be produced.

Promotion of Distributional Justice

The rich goes on becoming richer and the poor, poorer because of market economy: ownership of FOP & pricing.

A modern state does not allow this sort of situation and uses tools like: progressive taxes on higher incomes, subsidies or free services for low income groups, higher taxes on luxury goods & vice versa and pension etc.

Removal of Distortions in the Economy

Economic fluctuations or distortions are injurious for the health of economy.

Modern state is bound to remove all such distortions and bring about economic stability.

Stabilize the level of employment and prices by maintaining aggregate demand at an optimum level.

Example

It can increase public expenditures and reduce taxation in times of falling levels of employments and prices.

And can reduce public expenditures and increase taxation in the event of rising price level.

OR if the employment and price levels are at optimum, it can maintain public expenditure and taxation at the existing level.

Capital Formation and Economic Growth

In underdeveloped and developing countries we have the problems of lack of capital formation and improper use of resources.

Consequently, the per capita income is low, level of consumption is high and rate of savings is low: Viscous circle of poverty

The transfer of savings from households and governments to increase output and economic expansion.

Capital Formation and Economic Growth…(Cont…)

Low income-low rate of savings low capital investment underemployment of resources lower per capita income.

The role of state is to fulfill its normal duties and undertake plan to use of resources in a well conceived manner.

The use of taxation, borrowing and deficit spending to mobilize resources & accelerate eco growth to raise capital investment.

Capital Formation and Economic Growth…(Cont…)

By rightly using the instrument of taxation, govt can transfer resources from consumption to investment, increase the rate of savings and level of investment, increase public investment in projects of mass benefit and welfare and minimize income and wealth inequalities.

Additionally resources can be raised through borrowings and deficit financing.

Public vs Private Finance Similarities: Both have ultimate aim to satisfy the

wants of the society

Public vs Private Finance

Both raise funds for financing their activities through borrowing

Both are guided in making decisions by the fundamental principle: most important wants are given top priority.

Public vs Private Finance

Dissimilarities: The private unit cannot go beyond a certain

limit and for a longer period, whereas the public bodies can borrow limitlessly and for a longer period.

In case of private finance the limit is set by creditworthiness and repayment of previous loan, this is not the case in PF

The state can raise loans internally as well as externally.

Public vs Private Finance

Dissimilarities: Private finance is governed by the profit

motive, the govt is chiefly guided by political, administrative and the social benefit considerations.

The govt is not guided by short term considerations; the interest of the entire economy is supreme even at the risk of running economic losses.

Public vs Private Finance

Dissimilarities: For discharging its debt obligations the govt

can create currency, but private unit does not have this authority.

Public vs Private Finance

Dissimilarities: Private unit adjusts its expenditures to

income, the govt just does the reverse.

Public vs Private Finance

Taxation beyond a limit would effect savings and investments and would adversely effect production.Excessive borrowing by govt may dry up resources for private investment.Too much use of deficit financing would create inflation etc.

Chapter 2

The Theory of Public Goods

BBA 8th Semester Bakhtar University

The Theory of Public Goods

Unlimited wants and limited resources to satisfy these wants, be it an individual or an economy.

Wants are ever increasing, resources are not.

Solution: keep the wants limited to the extent of availability of resources OR try to use resources judiciously and to the maximum.

The Theory of Public Goods (Cont…)

Pre-industrial era, socio-economic life was mostly governed by the religion.

Industrial revolution gave birth to capitalism and capitalist economy: the ownership and use of FOP are in the hands of individuals.

In socialist system, the economy is dominated by the public sector.

While mixed economy is the combination of both public and private sectors.

Public Goods & Private Goods

Public goods are those which satisfy public wants (social wants).

Private goods are those which satisfy private or individual wants: only that person who consumes or uses it. Other person do not derive any satisfaction.

Social Wants

Social Wants are those “ which are satisfied by services that must be consumed in equal amounts by all”.

The benefits accrue(to increase over a period of time) to all and are not subject to price payments.

Examples, provision of public parks, flood control measures, defense services and the like.

Promote the welfare of whole society.

Public Goods vs Private Goods

Private goods are rival in consumption while Public goods are non-rival in consumption.

The consumption of public goods by one person does not reduce the amount available to others.

Private goods are priced in the market and those who can pay for them are allowed their use.

Public Goods vs Private Goods

Public goods do not follow the principle of exclusion---the benefits are available to all in the community and none is excluded.

Examples: Health, transportation etc. are the facilities provided by the government to all the people living in a country.

Public Goods vs Private Goods

Finally, private goods are divisible according to their use. Those who want to use them pay for and take them from the market.

While in Public goods this is not the case. For example, the police service.

No particular person or section can be deprived of this benefit.