Public finance |
---|
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Public expenditure can be defined as,
“ | The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure. | ” |
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 as 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 lead 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”.
Dalton’s Principle of Maximum Social Advantage- Maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when Benefits from Marginal Utility of Expenditure = Marginal disutility due to imposition of taxation. He explains this principle with reference to
In the given figure “P” is the point of Maximum Social Advantage. At this point MSS=MSB.
At a point before P, i.e. “P1” P1S1 > Q1S1 which implies MSB>MSS. And at point after P, i.e. “P2” MSS>MSB as Q2P2>S2P2.
Pigou’s Principle of Maximum Aggregate Benefit
He explains it with respect to “Net Social Benefit” (NSB) which is the difference between MSB and MSS. It is maximum when MSS=MSB. In the given figure the point “E” is the point of Maximum Aggregate Benefit, as the NSB is maximum at this point.
Bowens model
Considering the case of only Public goods, Bowen states that “If goods are consumed by people then they themselves should provide the cost of those goods”.
Satisfaction that a person gets from the same commodity will differ from person to person. Hence, the contribution that a person will make to its cost will depend on their satisfaction.
The more the number of times they use the good, the more will be the cost paid by them.
MUA + MUB = MCZ
OR
PZA + PZB = MCZ
OR
QPZA + QPZB = TCZ
a and b are two different consumers paying w and x amount of cost and amount paid by them together sums up to total cost OQPU.
Erik Lindahl | |
---|---|
Born | November 21, 1891 |
Died | January 6, 1960 | (aged 68)
Nationality | ![]() |
Academic career | |
Field | Political economics |
School or tradition | Stockholm School |
Voluntary Exchange Theory of Lindhal for determination of public Expenditure
It was introduced by Sweedish Economist “ Erik Lindahl in 1919”. According to his theory, determination of public expenditure and taxation will happen on the basis of public preferences which they will reveal themselves. Cost of supplying a good will be taken up by the people. The tax that they will pay will be revealed by them according to their capacities.
Public finance |
---|
![]() |
Public expenditure can be defined as,
“ | The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure. | ” |
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 as 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 lead 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”.
Dalton’s Principle of Maximum Social Advantage- Maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when Benefits from Marginal Utility of Expenditure = Marginal disutility due to imposition of taxation. He explains this principle with reference to
In the given figure “P” is the point of Maximum Social Advantage. At this point MSS=MSB.
At a point before P, i.e. “P1” P1S1 > Q1S1 which implies MSB>MSS. And at point after P, i.e. “P2” MSS>MSB as Q2P2>S2P2.
Pigou’s Principle of Maximum Aggregate Benefit
He explains it with respect to “Net Social Benefit” (NSB) which is the difference between MSB and MSS. It is maximum when MSS=MSB. In the given figure the point “E” is the point of Maximum Aggregate Benefit, as the NSB is maximum at this point.
Bowens model
Considering the case of only Public goods, Bowen states that “If goods are consumed by people then they themselves should provide the cost of those goods”.
Satisfaction that a person gets from the same commodity will differ from person to person. Hence, the contribution that a person will make to its cost will depend on their satisfaction.
The more the number of times they use the good, the more will be the cost paid by them.
MUA + MUB = MCZ
OR
PZA + PZB = MCZ
OR
QPZA + QPZB = TCZ
a and b are two different consumers paying w and x amount of cost and amount paid by them together sums up to total cost OQPU.
Erik Lindahl | |
---|---|
Born | November 21, 1891 |
Died | January 6, 1960 | (aged 68)
Nationality | ![]() |
Academic career | |
Field | Political economics |
School or tradition | Stockholm School |
Voluntary Exchange Theory of Lindhal for determination of public Expenditure
It was introduced by Sweedish Economist “ Erik Lindahl in 1919”. According to his theory, determination of public expenditure and taxation will happen on the basis of public preferences which they will reveal themselves. Cost of supplying a good will be taken up by the people. The tax that they will pay will be revealed by them according to their capacities.