Public Finance

• Capitalist/free market economy


  Most business and consumption decisions are left to private firms and individuals, government does not get involved in owning the means of production or deciding what and how to produce
• There is no "pure capitalist" system without any kind of government intervention, in practice there are degrees of government intervention - a mixed economy
• Capitalist/free market economy


  Most business and consumption decisions are left to private firms and individuals, government does not get involved in owning the means of production or deciding what and how to produce
• Public finance


  A field of economics concerned with how a government raises money, how that money is spent and the effects of these activities on the economy and society
• Main functions of government

  • Protection of private property/national security
  • Raising taxes
  • Providing public services
  • Regulation of markets
  • Macroeconomic management
  • Reducing inequality/poverty
• Public finance


  • Studies how governments at all levels – national, state and local – provide the public with desired services and how they secure the financial resources to pay for these services
• There is no "pure capitalist" system without any kind of government intervention, in practice there are degrees of government intervention - a mixed economy
• Protection of private property/national security

  Ensuring basic law and order, protecting rights to private property, providing national defense
• Public finance


  A branch of economics concerned with the planning and expenditure of public resources
• Policing and courts


  Example of a public good which usually require government provision
• Main Functions of Government

  • Protection of private property/national security
  • Raising taxes
  • Providing public services
  • Regulation of markets
  • Macroeconomic management
  • Reducing inequality/poverty
• Public finance


  • Investigates the role of the government in reducing economic disparities, collecting and dispersing taxes and stimulating economic growth
• Raising taxes


  To provide public goods and private services, government has to consider efficiency, ease of collection and fairness, can also raise through borrowing and selling bonds
• Protection of private property/national security

  Ensuring basic law and order, protecting the rights to private property, providing for national defense
• Objectives of public finance

  • Managing public needs
  • Economic development
  • Removes inequality
  • Maintaining price stability
• Providing public services


  Public goods tend to be not provided in a free market due to free rider problem, government provides services like education and healthcare
• Managing public needs


  The main objective is managing the basic needs of public like food, shelter, health, infrastructure and health
• Policing and courts


  Example of a public good which usually require government provision
• Regulation of markets


  Regulating monopoly power and monopsony power
• Raising taxes


  To provide public goods and private services, government has to raise tax in efficient, easy to collect and fair ways, can also raise through borrowing and selling government bonds
• Economic development


  Public finances help in public finance management, which results in economic development
• Macroeconomic management


  Using fiscal and monetary policy to influence aggregate demand, resolve recessions, and avoid inflation
• Providing public services


  Public goods tend to be not provided in a free market due to free rider problem, government provides services like education and healthcare
• Removes inequality


  Aims at removing the inequality by proper allocation of resources
• Reducing inequality/poverty


  Ensuring everyone has equal opportunity, addressing issues of inherited wealth and monopoly power
• Regulation of markets


  Regulating monopoly power, regulating labor markets
• Maintaining price stability


  Helps control inflation by various packages and means for its development
• Functional finance


  Macroeconomic theory promoting government intervention in the economy, deficit spending to reduce unemployment, controlling consumer spending through tax policy, controlling interest rates, inflation, and cash flow
• Macroeconomic management


  Using fiscal and monetary policy to influence aggregate demand, resolve recessions, and avoid inflation
• Types of public finance

  • Public revenue
  • Public expenditure
  • Public debt
  • Financial administration
• Public revenue


  Concerned with the income of the Government through various sources
• Reducing inequality/poverty


  Ensuring everyone has equal opportunity, addressing issues of inherited wealth and monopoly power
• Functional finance


  • Government's priority is balancing supply and demand at full employment, not balancing the budget
  • Purpose of taxation is to control consumer spending, not to pay government expenses and debts
  • Government should print, hoard, or destroy money as needed to achieve goals
• Fiscal functions of finance

  • Allocation function (provision of social goods)
  • Distribution function (adjusting income and wealth distribution)
  • Stabilization function (using fiscal policy to achieve full employment and price stability)
• Functional finance


  Macroeconomic theory promoting government intervention in the economy, deficit spending to reduce unemployment, controlling consumer spending through tax policy, controlling interest rates, inflation, and cash flow
• Sources of public revenue

  • Revenues from both tax and non-tax resources
  • Borrowings from both domestic and foreign sources
  • Withdrawals from available cash balances
• Allocation function


  Provision for social goods, dividing total resource use between private and social goods, choosing mix of social goods
• Functional finance


  • Government's priority is balancing supply and demand at full employment, not balancing the budget
  • Sole purpose of taxation is to control consumer spending, government can pay expenses by printing money
  • Government should print, hoard, or destroy money as needed to achieve goals
• Tax revenue


  Compulsory contribution mandated by law and exacted by the government for public purpose
• Fiscal Functions of Finance

  • Allocation Function
  • Distribution Function
  • Stabilization Function