Public Finance

Abdulrazak Yasin
2023*202
 CHAPTER ONE

INTRODUCTION TO PUBLIC FINANCE

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 MEANING AND SCOPE OF PUBLIC FINANCE

• PublicFinance—Meaning and Scope- Public and

Private finance- principles of Maximum Social
Advantage—Public Goods, Private Goods, Mixed
Goods and Merit Goods (Concepts Only)
• Public finance is a field of economics concerned with
how a government raises money, how that
money is spent and the effects of these
activities on the economy and society. It studies
how governments at all levels—national, state
and local—provide the public with desired services
and how they secure the financial resources to pay
for these services.
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 MEANING AND SCOPE OF PUBLIC FINANCE
• Public finance deals with the finances of public bodies –
national, State or Local- for the performance of their
functions.
• The performance of these functions leads to
expenditure. The expenditure is incurred from funds
raised through taxes, fees, fines & penalties, sale of
goods and services, loans and grants.
• The different sources constitute the revenue of the public
authorities.

• Public finance studies the manner in which revenue is

raised; the expenditure is incurred upon different items
etc.
• Thus, public finance deals with the income and
expenditure of public authorities and principles,
problems and policies relating to these matters. * 4
 MEANING AND SCOPE OF PUBLIC FINANCE
• Public Finance is the branch of economics
that studies the taxing and spending
activities of government.
• Public Finance is nothing else than a
sophisticated discussion of the relationship
between the individuals and the state.
• The key problems relate to the use of real
resources. For this reason, some
practitioners prefer to label public finance
as public sector economics or simply public
economics. Public finance encompasses
both positive and normative analysis. * 5
 MEANING AND SCOPE OF PUBLIC FINANCE
Economists Publication Definition
For all States – whether crude or highly developed – some
Charles F. Public Finance – provisions of the kind are necessary and therefore supply
Bastable 1892 and application of state resources constitute the subject
matter of a study which is best entitled in English as Public
Finance
Principles of One of those subjects which lies on the border line between
Dalton Public Finance- Economics and Politics. It is concerned with the income and
1922 expenditure of public authorities and with the adjustment
of one to the other
Harold Groves ----- A field of enquiry that treats the incomes and outgoes of
governments –federal, state, and local

PE. Taylor The Economics Public Finance is the fiscal science, its policies are fiscal
of public policies, its problems are fiscal problems
finance
The main content of Public Finance consists of the
Public Finance Mgt examination and appraisal of the methods * by which
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Mrs. Ursula Public governing bodies provide for the collective satisfaction
 MEANING AND SCOPE OF PUBLIC FINANCE
• Public finance may be defined in a general term
"as being concerned with the manner in which
public services are provided.
• However, this definition is not clear in
determining the activities of public finance.
• The price criterion, which means that free or
subsidized goods and services are considered
public services.

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 MEANING AND SCOPE OF PUBLIC FINANCE
• This is because there are various criteria that
may be used to confine the framework of public
finance which lead to different definitions such
as:
• The goods criterion, which means that all non-
marketable goods and services are considered as
public services such as defense and justice.
• The consumption criterion, which means that
all collective consumption goods and services are
considered as public services.

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 MEANING AND SCOPE OF PUBLIC FINANCE
Public finance involves;
•The study of the taxing and spending activities
of government
•The effect on allocation of resources and
distribution of income
•It is micro focus on efficiency and equity
•In many industrialized countries, spending and
taxation of the government form constitute a
large portion of the nation’s total economic
activities. For example, total government
spending in United States equals 40 percent of
the nation’s gross domestic product (GDP). * 9
 MEANING AND SCOPE OF PUBLIC FINANCE
• Scope of public Finance
• Scope of public finance is unclear – government has
role in many activities, but in public finance the
government’s focus will be on taxes and spending
• Focus is on microeconomic functions of government
but polices that affect overall unemployment or
price levels are left for macroeconomics.

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 Why need of public finance?
• Why public finance is needed?
1.Governments provide public goods by financing
public items and services such as roads, military
forces, lighthouses and street lights because
private citizens would not voluntarily pay for these
services and therefore businesses have no
incentive to produce them
2.Public finance also enables governments to
correct or offset undesirable side effect of a market
economy.
• These side effects are called spillovers and
externalities
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 Why need of public finance?
• For example: households and industries may
generate pollution and release it in to the
environment without considering the adverse
effect pollution has on others.
• Pollution is a spillover because it affects badly
people who are not responsible for it.
• To correct a spillover, the governments can
encourage or restrict certain activities. For
example, government can sponsor recycling
programs to encourage less pollution, pass law
that restrict pollution or impose charges or tax on
activities that adversely affects the environment
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 Why need of public finance?
3. Public finance provides government programs
that
moderate incomes of wealthy and poor
people,
•These programs include social security, welfare,
and other social programs.
•Governments redistribute income by collecting
taxes from the wealthier citizens to provide
resources for the needy ones.
•For example, some elderly people or people
with disabilities require financial assistance
because they cannot work, and these taxes fund
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programs support people with low income levels.

 Public spending Vs Government spending

Public spending
•Each year, national, provincial, and local governments
create a budget to determine how much money will be
needed to spend during upcoming year.
•The budget determines which public goods to produce,
which spillovers to correct, and how much assistance
needed to provide to the financially disadvantaged people.
•The chief administrator of the government- such as the
prime minister, governor, or mayor – propose the budget.
•The legislature – such as the parliament, provincial council
or municipality council ultimately must pass the budget
•The legislature often changes the size and composition of
the budget, but the chief administrator will accept, reject
and veto. * 14
 Public spending Vs Government spending

• Government spending
• Government spending takes two forms
• TRANSFER SPENDING
• EXHAUSTIVE SPENDING
• Exhaustive Spending: Refers to the purchase made by a
government for the production of public goods. For example,
to construct a new harbor the government buys and uses
resources from the economy such as buying raw materials
and by creating to employment of involved peoples
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 Public spending Vs Government
spending

• Transfer spending: occurs when the government

transfer income to people to help them support
themselves
• Transfers can be one of two kinds: Cash transfers
or in-kind transfers
• Cash transfers are cash payments, such as social security,
checks and welfare payments
• In-kind transfers involve no cash payments but instead
transfer goods and services to the receipts. Examples of in-kind
transfers include food stamp coupon and Medicare
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 Public Finance and Ideology

• How should a government function in economic sphere?

• Views of how government should function in the economic
sphere are influenced by ideological views concerning the
relationship between the individual and the state.
• Political philosophers have distinguished two major
approaches:

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 Public Finance and Ideology

I. Organic view of government

II. Mechanistic view of government

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 Public Finance and Ideology

I. Organic view of government

• Society is a natural organism, each individual is
part of the organism, and the government is the
heart of the organism.
• In an organic view of sociology, individuals are
valued only by their contribution to the
realization social goals. These goals are
determined by the government.

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 Public Finance and Ideology

I. Organic view of government

• Individuals are important only as part of the
society, and the good of the individual is
subordinate to the good of society.
• Society or community is above the individual. The
objectives of a society are set by government.
• The problem is who is to represent government.
• Platon: realization of perfect rationality.
• Hitler: realization of racial purity.
• Lenin: realization of socialism
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 Public Finance and Ideology
II. Mechanistic view of
government
• Government is not an organic part of society.
Rather, it is a contrivance (device) created by
individuals to better achieve their individual
goals and it is erected to further individual goals.
• But It is not clear how the government can
reconcile sometimes conflicting individual goals.
• At the center of attention is the individual, not
the group, not the society.
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 Public Finance and Ideology
II. Mechanistic view of government
• Government exists for the good of the nation, but
the problem
• is what is good? and how government should
achieve it?
• Government is trust and state servants are
trustees. Trust and trustees have been created for
the wellbeing welfare of the nation.
• Attentions
• General consensus: it is good for individuals when
government protects them from violence, for
which reason it must have the power of coercion,
otherwise there will be anarchy * 22
 Public Finance and Ideology
II. Mechanistic view of
government
• Adam Smith (Wealth of Nations, 1776) believes
that “government should protect a society
against violence and the assaults of other
independent societies….. and every member of
the society against injustice and oppression
from any other member of the society”

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 Public Finance and Ideology
II. Mechanistic view of
government
• However, J. S. Mill held that “the only reason for
which a government should use its power to coerce
any member of society against his will is to prevent
him injuring others.”
• The minimum that government should provide is
protection and provide the infrastructure necessary
for the life of society such as lighthouses, roads,
bridges, sewers etc.
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 Public Finance and Ideology
On conclusion
1. Organic View is that-
•The state is an organism, government is the heart
•Individuals are part of the community, goals set
by state
2. Mechanistic View is that-
•Government is ‘by the people for the people’—
individuals center stage
•Government does what is ‘good’ for individuals
•Minimum function: protect from violence,
injustice, oppression (Libertarian) * 25