UNIT I: THE
OVERVIEW OF PUBLIC
FINANCE
The Role and Scope of
Public Finance
Government
➢ is an organization formed to exercise authority
over the actions of people who live together in
a society and to provide financial and non-
financial essential services.
Example of the role and scope of Government’s
services are as follows :
• Construction and maintenance of • Protection to industries like high
roads and bridges, communication tariff rates on competing foreign
and power facilities, both for home articles;
and industrial uses; • Level of money supply, the interest
• Educational and health services; and discount rates;
• Peace and order; • Development of new technologies;
• Fire protection; • Financing manpower training;
• Subsidies to consumers in terms of • Union and management problems
lower prices for essential are arbitrated;
commodities; • Air and water pollution are looked
into;
• Production and sale of certain items that impair
health;
• Mental facilities are scrutinized;
• Solution to traffic problems;
• Construction and maintenance of parks and
recreational places;
• Promotion and support of cultural and aesthetic
endeavors are undertaken;
• Fertility and mortality rates are looked into; and
• Price and wage levels are established.
Political institutions constitute the
rules and generally accepted
procedures that evolve in a community
for determining what government does
and how government outlays are
financed.
PUBLIC FINANCE AND ITS CLASSIFICATION
Public Finance, according to Hyman (2014),
is a field of economics that studies
government activities and the alternative
means of financing government
expenditure.
Classification of Public Finance:
1. Private Want and Public Wants
Private wants are those that can be satisfied through the mechanism
of the market because their enjoyment can be made subject to price
payments.
Public wants are those that cannot be satisfied through the working
of the market because their enjoyment by any individual consumer is
independent of his payment or contribution.
2. Financial Means Available
Private finance cannot avail of taxation and
printing money as means of raising revenue in the
same way as public finance.
Public finance can rely more heavily on
borrowing to augment its resources than in
private finance.
3. Budgeting Procedures
In private finance, the preparation of the budget starts from the
income side, that is, the private entity determines income and
additional resources from borrowing, and then proceeds to
individual expenditure items.
Public finance, on the other hand, usually works the other way
around. The government determines first its expenditure needs,
and then looks around for possible ways of financing them.
BASIC ECONOMIC PROBLEMS
A. What goods are to be produced?
It is not really possible to produce all the goods that people want
for their satisfaction. To remedy such problem, a system of
priorities has to be established. Clearly, basic needs of the
people are given to priority.
Types of Economic System:
• Capitalism
• Communism
• Socialism
B. How are the goods produced?
The ideal situation is to produce the goods with the most efficient method.
This involves machines, technology, management, and skills.
C. For whom are the goods produced?
The distribution of goods is determined by the economic system. Under
capitalism, goods are allocated in the markets.
In communism, goods are distributed according to the needs of the people.
The government supplies the needs of the people, such as food, clothing,
shelter, education, health, etc.
Under socialism, both market and state determine the distribution of goods
The mixed system is a blend of
free market economy and
Mixed government intervention. It is
intended to give incentives to
businessmen, and to protect the
Economic welfare of the consumers. Due
to imperfections of the market
System
system, and the presence of less
fortunate members of society,
the government has to interfere
in market forces.
Economic Development
Economic development is a progressive process
of improving human conditions, such as the
reduction or elimination of poverty,
unemployment, literacy, inequality, disease and
exploitations. Evidently, economic development
is not only an economic process. It involves both
economic and non-economic factors.
Example:
Economic factors are Non-economic factors
capital, technology, and are culture, religion,
market. government, education,
among other things.
Classification of Countries
The economy of a country is measure by its gross national
product (GNP) or per capita income. If the GNP of a certain
nation is near the GNP of the rich countries, it is classified as
intermediate. Those that are far below are classified as less
developed. The rich ones are classified as highly developed.
Countries which are backward, underdeveloped, agricultural,
developing or less developed are generally considered poor
nations.
Example:
Highly developed countries– US, Japan,
France, Denmark, Australia, Russia,
Sweden, West Germany, Canada, and Israel
Intermediate countries– Argentina, Cuba,
Libya, Spain, South Africa, Austria, Saudi
Arabia, Singapore, Poland, Venezuela
Less developed countries– Kenya,
Somalia, Tanzania, Uganda, El
Salvador, Honduras, Peru, India,
Philippines, Vietnam
Development and its Obstacles
Is it really possible to attain economic growth without
economic development?
Development means more than imposing buildings, beautiful
houses, elegant cars, money or modern machines. It includes
fundamental changes in society, ways of life, values and institutions.
On the other hand, development without growth is inconceivable.
Whenever there is real development, there will always be growth
because growth is a natural consequence of development
Obstacles to Development
1. Deficient in capital
2.Population explosion
3. Man Himself
