Chapter 1

The Role and Scope of Public Finance

Evidence of Government Influence
1. Construction, maintenance of roads, bridges, communication, power facilities
both for home and industrial uses, educational and health services, peace and order
and fire protection
2. Government subsidy for prices
3. Protection for new industries (ie high tariff rates for competing foreign products)
4. Monetary policy (level of money), fiscal policy (discount and interest rates)
5. Investment incentives (tax and non-tax measures)
6. Development of new technology
7. Government regulation (competition)
8. Union problems, air and water pollution/health problems
9. Urban renewals, traffic problems
10. Fertility problems and so on and on
The government should raise revenue through imposition of taxes.
Expenditures = Revenue
There are only two things in life: death and taxes
What Is, Why the Need to Study, Public Finance?
Public Finance
- Field of study in economics
-Synonymous to government finance, public economy or the economics of
public household
-The study of the economic aspects that arise in the operations of public
budgett
Economy with no government does not need public finance.
Presence of a political body (free enterprise, centrally managed system and mixed
type system) requires the study of public finance. All have need to raise revenues.
Private vs Public Finance
Goal: Satisfaction of human wants
Distinction between Public vs Private
1. The difference between private and public wants
2. The financial means available
3. The budgeting procedure practiced
Private finance relates to private wants while public finance deals with public wants.
1. Private wants are those that can be satisfied through the mechanism of the
market because their enjoyment can be made subject to price payments.
2. Public wants, are those that can be satisfied through the working of the market
because their enjoyment by any individual consumer is independent of his/her
payment or contribution.
Private wants can be provided by the market mechanism, public wants must be
satisfied by the budget.
Public wants:
1. Social wants wants whose satisfaction should be subject to the principle of
consumer sovereignty that is resources should be allocated in response to the
demand of consumers
2. Merit wants subject to the exclusion principle and are satisfied by the market
within the limits of effective demand. Ie. Free education, low-cost housing and
subsidized consumer items essential
Private Finance cannot avail taxation and printing money as means of raising
revenue. Government can also rely on borrowing.

Budgeting procedures differ .

Private finance, starts from the income side then to individual expenditures. Public
finance works the other way around. The government determines the expenditures
first, and looks around how to finance them. This contributes to deficit budget.

Provision and Production of Public Goods

Changing Role of Government in the Economy
The role of public finance in the economy has changed substantially.
Early Stages: The government should keep its expenditures at the lowest level
possible. The best government is one that governs the least
1. The government should balance its budget annually (same as private and
individual).
2. The government taxing and spending activities should exert neutral effects on
the society.
Over the years, the trend has been towards increased governmental participation in
economic activities.
Objectives of Free Enterprise System/Capitalistic/free Market
1. To strengthen economic freedom.
2. To promote overall economic efficiency
3. To promote economic growth
4. To promote economic stability
5. To improve economic security

Public Finance and the Changing Role of Government

1. Allocation section the provision of goods and services to satisfy public wants,
may be considered the historically accepted objective of budget ploicy
2. Stabilization Maintaining a high level of resource utilization that is full
employment of all factors of production and a stable value of money (cue: inflation)
A stabilization policy is a macroeconomic strategy enacted by governments and
central banks to keep economic growth stable, along with price levels and
unemployment. Ongoing stabilization policy includes monitoring the business cycle
and adjusting benchmark interest rates to control aggregate demand in the
economy. The goal is to avoid erratic changes in total output, as measured by gross
domestic product (GDP) and large changes in inflation; stabilization of these factors
generally leads to moderate changes in the employment rate as well. (inflation and
unemployment)
3. Stabilization

British economist John Maynard Keynes spearheaded a revolution in economic

thinking that overturned the then-prevailing idea that free markets would
automatically provide full employmentthat is, that everyone who wanted a job
would have one as long as workers were flexible in their wage demands (see box).
The main plank of Keyness theory, which has come to bear his name, is the
assertion that aggregate demandmeasured as the sum of spending by
households, businesses, and the governmentis the most important driving force in
an economy. Keynes further asserted that free markets have no self-balancing
mechanisms that lead to full employment. Keynesian economists justify government
intervention through public policies that aim to achieve full employment and price
stability.
Aggregate demandmeasured as the sum of spending by households,
businesses, and the governmentis the most important driving force in an
economy. Keynes further asserted that free markets have no self-balancing
mechanisms that lead to full employment. Keynesian economists justify
government intervention through public policies that aim to achieve full
employment and price stability.