Part of a series on Government
Public finance
Policies Economic policy Fiscal policy · Monetary policy Trade policy · Investment policy Agricultural policy · Industrial policy Energy policy · Social policy Policy mix
Fiscal policy Tax policy · Budgetary policy Revenue · Spending · Budget Deficit or Surplus · Deficit spending Debt (External · Internal) Finance ministry · Fiscal union
Monetary policy Money supply · Interest rate Monetary base · Discount window Reserve requirements Bank reserves · Gold reserves Monetary authority (central bank · currency board) · Monetary union
Trade policy Tariff · Non-tariff barrier Balance of trade · Gains from trade Trade creation · Trade diversion Protectionism · Free trade Commerce ministry · Trade bloc
Revenue and Spending Tax revenue · Non-tax revenue Mandatory spending Discretionary spending
Optimum Balanced budget (fiscal) Price stability (monetary) Growth (trade and investment)
Reform Fiscal adjustment · Monetary reform
v t e

Public expenditure can be defined as,

^[1]

It is basically spending made by the government of a country on citizens' needs on items such as pension, provision, infrastructure etc. Public expenditure was restricted only to a small extent till 19th century due to laissez faire followed by the government, as classical then believed money left in private hands could bring better returns. It was only in 20th century when John Maynard Keynes pointed out the important role of public expenditure in determining the level of income and distribution in the economy. Since then government’s expenditure has shown an increasing trend.

Causes of growth of public expenditure[link]

Even though public expenditure came into picture in 20th century, accelerating growth of government expenditure began in late 70s.

There are several factors that have led to enormous increase in public expenditure through the years

• Defense Expenditure-due to modernization of defense equipment by navy, army and airforce to prepare the country from war or for prevention.^[2]

• Population growth- It increases with the increase in population, more of investment is required to be done by government on law and order, education; infrastructure etc. investment in different fields depending on the different age group is required.

• Welfare activities- women welfare, mid day meals, pension provisions etc.

• Provision of public and utility services-provision of basic public goods given by government (their maintenance and installation) such as transportation.

• Accelerating economic growth- in order to raise the standard of living of the people.

• Price rise- higher price level compels government to spend increased amount on purchase of goods and services.^[3]

• Increase in public revenue- with rise in public revenue government is bound to increase the public expenditure.

• International Obligation- maintenance of socio economic obligation, cultural exchange etc. (these are indirect expenses of government)

Theories of Public expenditure[link]

Dalton’s Principle of Maximum Social Advantage. Graph showing point of Maximum Social Advantage at point "P"^[4]

Pure theories[link]

Principle of Maximum Social Advantage[link]

Taxation (government revenue) and government expenditure are the two tools. Neither of excess is good for the society, it has to be balanced to achieve maximum social benefit. Dalton called this principle as “Maximum Social Advantage” and Pigou termed it as “Maximum Aggregate Welfare”.

Dalton’s Principle of Maximum Social Advantage- Maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when Benefits from Marginal Utility of Expenditure = Marginal disutility due to imposition of taxation. He explains this principle with reference to

• Maximum Social Benefit (MSB)
• Maximum Social Sacrifice (MSS)^[5]

In the given figure “P” is the point of Maximum Social Advantage. At this point MSS=MSB.

At a point before P, i.e. “P₁” P₁S₁ > Q₁S₁ which implies MSB>MSS. And at point after P, i.e. “P₂” MSS>MSB as Q₂P₂>S₂P₂.

Pigou’s Principle of Maximum Aggregate Benefit. Graph showing point of Maximum Aggregate Benefit at point "E"

Pigou’s Principle of Maximum Aggregate Benefit

He explains it with respect to “Net Social Benefit” (NSB) which is the difference between MSB and MSS. It is maximum when MSS=MSB. In the given figure the point “E” is the point of Maximum Aggregate Benefit, as the NSB is maximum at this point.

Bowen's Model.

Bowens model[link]

Considering the case of only Public goods, Bowen states that “If goods are consumed by people then they themselves should provide the cost of those goods”.

Satisfaction that a person gets from the same commodity will differ from person to person. Hence, the contribution that a person will make to its cost will depend on their satisfaction. The more the number of times they use the good, the more will be the cost paid by them.

MU_A + MU_B = MC_Z

OR

P^Z_A + P^Z_B = MC_Z

OR

QP^Z_A + QP^Z_B = TC_Z

a and b are two different consumers paying w and x amount of cost and amount paid by them together sums up to total cost OQPU.

Erik Lindahl

Stockholm School
Born	(1891-11-21)November 21, 1891
Died	January 6, 1960(1960-01-06) (aged 68)
Nationality	Sweden
Field	Political economics
Influenced	Knut Wicksell

Voluntary Exchange Theory of Lindhal for determination of public Expenditure[link]

It was introduced by Swedish Economist “Erik Lindahl in 1919”.^[6] According to his theory, determination of public expenditure and taxation will happen on the basis of public preferences which they will reveal themselves. Cost of supplying a good will be taken up by the people. The tax that they will pay will be revealed by them according to their capacities.^[7]

References[link]