Public finance

CHAPTER-1

FISCAL FUNCTIONS

PUBLIC FINANCE
PUBLIC FINANCE is study of finance related to government entities. It revolves around the role of government income and expenditure in the economy.

SCOPE

Public Income: Income of the government. Can be tax income or non tax income
Public Expenditure: Money spent by government entities on health, education etc.
Public Debt: Arises when public expenditure exceeds public income
Financial Administration: Includes preparation, passing, and implementation of government budget and various government policies.

FUNCTION

Allocation Function: It studies how to allocate public expenditure most efficiently to reap maximum benefits with the available public wealth.
Distribution Function: It aims at reducing the inequalities through redistribution of income and wealth.
Stabilization Function: It aims at eliminating the business fluctuations and its impact on the economy.

Private finance vs public finance

Private finance

In private finance, individuals adjust their spending patterns according to their income level.
Private individuals try to maximise their profits.
An individual spends less than his income to maintain surplus budget.
Private finance transactions are maintained secretly.

V/s

Public finance

In public finance, the government determines the size of expenditure which has to be spent on different segments and adjusts income to expenditure.
Public authorities are motivated by the welfare of society.
The Government prefers to have a deficit budget, especially while financing economic development.
Public finance transactions are open to everyone in the society.

Market failure

Reasons for market failure

1)Positive and negative externalities, with appropriate diagrams
2)Short-term and long-term environmental concerns, with reference to sustainable development (IB only)
3)Lack of public goods
4) Underprovision of merit goods
5)Overprovision of demerit goods
6)Abuse of monopoly power

Role of government

Possible government responses

1)Legislation
2)Direct provision of merit and public goods
3)Taxation
4)Subsidies
5)Tradable permits
6)Extension of property rights
7)Advertising to encourage or discourage consumption
8)International cooperation among governments