CHAPTER ONE

INTRODUCTION
 Public and Private Goods
 Private goods: refer to all those goods and services,
which are consumed by people to satisfy their personal
and private wants or needs. Eg. Articles of food,
clothing, shelter, recreation, transportation,
communication, etc.
 The distribution of these goods is based on effective
demand and market price.
 Those who do not want them or who are not in a
position to pay for them will be excluded from the
consumption of these goods.
 Public Goods
 Public goods are those which are demanded by all
members of the community in equal or more or less
equal measures. Eg. Defense, education, public
health, infrastructure facilities like power,
transportation and communication, etc.
 They are more or less equally available to all
citizens.
 They are financed and supplied by the government.
 Public Finance Defined
 Public finance is the study of income and expenditures
of the government.
 Also known as “public sector economics” or “public
economics.”
 Public finance is one of those subjects, which lie on the
borderline between economics and politics.
 Public finance is about government at the central, state,
and local levels.
 Scope of Public Finance:
 Public expenditure
 Public revenue
 Public debt
 Financial administration
 1. Public Expenditures
 expenses incurred by the Government for its own maintenance
and also for the preservation and welfare of society and economy
as a whole.
Government make investments for two purposes:
 Poverty alleviation:
 Food and Housing subsidies
 Provision of basic levels of education (primary and secondary)
 Provision of preventive health care services
 Creating an enabling environment for the private sector:
Provision of adequate, properly regulated, well-maintained and
efficient infrastructure of airports, roads and ports, electricity,
telecommunications, water, waste disposal and other similar
facilities.
 2. Public Revenue
 ‘Public Revenues’ includes all the income which the
Government obtains during a given period of time.
a) Tax revenues
b) Non-tax revenues:
 Fees
 Fines
 Gifts and grants
 Profits from properties owned (Eg .Royalty from mines and
oil fields, revs from forests, proceeds from privatizations,
income from land lease, etc.)
 Printing Paper Money
 3. Public Debt (National or Gov’t Debt)
 Public debt is the loans raised by Governments
 Purpose of Borrowing:
 Economic Development
 To repair damages resulting from natural calamities
 During times of wars
 Fighting Depression
 Controlling inflation
 Covering temporary budget deficits
 Sources
 Borrowings from individuals;
 Borrowing from commercial banks
 Borrowing from non-banking financial institutions
 Borrowing from central bank
 Borrowing abroad
 Public Debt…
 Government debt can be seen as an indirect debt of
the taxpayers.
 The government can borrow internally (internal debt)
or from abroad (external debt)

Can the government go bankrupt?

 4. Finance Administration
 Financial Administration includes the preparation
of financial budget, the control and
administrations of the budget, relevant problems,
auditing, etc.
 Financial Administration is properly regarded as the
fourth division of the subject, because it is as
necessary to know not only how a State gets
its revenues but when it gets them and for what it
spends them.
 Role of A government in an economy
(i) Allocation Function:
 Government has to provide public goods that individuals or private
businesses would not provide
(ii) Distribution Function:
 Through its tax and expenditure policy, government affects
distribution of personal income of households in a manner which is
just and fair. As such it taxes the rich and spends for the schemes
which benefit more the poor.
(iii) Stabilization Function:
 Stabilize the economy by reducing unemployment and inflation, and
promoting economic growth.
 Fiscal Federalism
 Fiscal federalism an area of study in public Finance that focuses on
the allocation of fiscal rights and responsibilities across different
levels of government in a federal government system.
 Issues of Fiscal federalism:
 How much should go to the central and how much to the states in
order to improve the efficiency of governing by improving the
allocation of funding and expenditures.
 Issues of taxation