- published: 02 Jan 2013
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Public finance is the study of the role of the government in the economy.
The purview of public finance is considered to be threefold: governmental effects on (1) efficient allocation of resources, (2) distribution of income, and (3) macroeconomic stabilization.
The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently (in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities). If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time (non-rival, non-excludable consumption), then private markets may supply too little of that good. National defense is one example of non-rival consumption, or of a public good.
Public expenditure can be defined as,
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.
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
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”.