Public Finance

public finance is the study of the financial activities of governments and public authorities.

divided into three categories:

a - Knowing what activities the public sector engages in and how these are organized (that is, revenue gathering and expenditures)

b - Understanding and foreseeing the full consequences of these governmental activities

c - Evaluating alternative policies.

The positive side describes the activities of the public sector, explains the reasons of the programs in existence and also analyses the consequences of government policies

The normative side, on the other hand, is concerned with designing new policies that meet certain objectives.

*two approaches are complementary, because, in order to make judgements about what activities the government should follow, one must know the consequences of government activities. Economists dealing with public finance both analyse actual policies and develop guidelines for government activities.

THE ECONOMIC FUNCTIONS OF GOVERNMENT

1)The allocation function: The responsibility of the government is to ensure that the resources of the society are used efficiently for the satisfaction of the wants of its members.

2)The distribution function of government :covers the activities involved in the redistribution of income. Distribution means the sharing of national income by individuals in a society.

3) The stabilization function of government: Stabilization means that aggregate demand and aggregate supply should be in equilibrium in order to ensure economic stability.

4) The growth function of government: is concerned with activities aimed at ensuring an adequate rate of growth. Growth is achieved by increasing national income at a satisfactory rate each year. This will mean more welfare to the individuals within the society.

1. The Allocation Function of Government

Two theorems exist in market economies. The first theorem dictates that the competitive market, through the price mechanism, leads to efficient allocation. The second says that, if initial efficient allocation is not achieved, then governmental redistribution may again lead to Pareto optimum.

Pareto efficiency is a state resulting in an improvement in welfare of one or more individuals without adversely affecting the welfare of others. Pareto optimal allocation of resources among uses exists if it is not possible to reallocate resources so as to improve the well-being of one person without making at least one other person worse off.

the major alternative techniques that the government can use to influence resource allocation.

a. Public Goods and Services

b. Semi-Public Goods

c. Public Economic Enterprises

d. Economic Regulations

a. Public Goods and Services:are the goods which have the characteristics of non-rivalness and non-excludability.

Non-rivalness (joint consumption): These are goods the consumption of which is nonrival. the idea that there are some goods the benefits of which can be enjoyed by more than one person at the same time.

Non-excludability: , these goods are not priceable. impossible or very costly to price these governmental goods and services because you are not able to detect the real size of the benefit received by the consumer.

b. Semi-Public Goods

Semi-public goods, which are also called quasi or impure public goods, are neither private nor purely public goods.Externalities are external gains or losses accruing from one's consumption or production and spreading over to others.

Two agents (a) the initiating agent who is the producer or consumer causing the externalitiy; (b) the recipient agent who is the producer or consumer receiving the externality.

* two types of externalities: negative and positive externalities.

Negative externalities (external diseconomies): If one's consumption or production may harm or give damage to others consumption or production, negative externality the activities of an individual or firm may damage or produce disbenefits to other parties. example smoking negative externalities.

Positive externalities (external economies): If one's consumption or production may benefit others consumption or production, we are faced with a positive externality. example education

externalities keep the market from reaching allocative efficiency because the gains or losses generated are external to the pricing system; they are unpriceable. The transaction costs of externalities misallocation of resources or a failure of the market economy to generate a Pareto optimum. positive externalities 3 types of interventions the government may engage in:

(i) Subsidies: Subsidies are monetary payments government budget to lower their prices Long-term, low-interest loans and tax reductions are examples of subsidies.

(ii) Government production at lower priceswe have a direct governmental influence on allocation because the government itself undertakes the responsibility of the production of the positive external good. supplies it at a lower price, in some cases free of charge

iii)compulsion:it regulate the consumption of certain goods and services.example in most country basic education is compulsory and parents have to send their children to school.

negative externalities arise from harmful production and consumption,

3 instruments the government may use. These are:

(i)Tax penalties or legal punishments to limit the production or consumption of a good. e.g. outlawing pollution

(ii) The government may impose excise taxes on goods so as to discourage their consumption or production. known as sumptuary taxes, e.g. taxes on the consumption of alcoholic drinks

(iii) The government itself may supply these type of goods and sell them at a very high price (e.g. alcoholic drinks, cigarettes).

c. Public Economic Enterprises

These are publicly owned companies which produce private type goods In this case, the government is directly involved in the provision of private or marketable goods. For example,