Definition & Concept of Public Expenditure
The spending done by the government of a country on the collective needs of the citizens is called public expenditure. The government incurs this expenditure to provide the goods and services that the competitive market would not be willing to provide. Public expenditure for goods and services can be considered as a means of supplying services in appreciable quantity that would not have been possible through the market.
In practice, the government needs to spend in order to run the government to serve society and protect the people from foreign aggression. Public Expenditure shows the decision of the Parliament and other independent executive bodies for the scope of public expenses. It is measured with respect to the public expenses made by the government in the previous year or last financial interval.
Objectives of Public Expenditure
Public expenditure is not only a financial mechanism, but it also aims at acquiring social objectives. The major objectives of public expenditure include:
- Administration of law, order, and justice
- Maintenance of police force, army, and provision for defence goods
- Public administration
- Servicing of public debt
- Development of industries, transport, and communication
- Provision of public health, healthcare and education
- Promotion of socio-economic welfare of the citizens
Difference Between Public and Private Expenditure
It is well acknowledged that there is a resemblance between public & private expenditure. Neither the public nor the private individual likes to incur expenditure without any return. Both public as well as private expenditure possesses the element of flexibility.
Also, in each case, there can be more than one way of raising additional resources. Contrary to this, there are also points of difference between the two. The main points of difference between public and private expenditure can be summarised as follows:
- Public expenditure is a type of spending usually done by firms in the public sector or govt organizations; examples include the building of schools, dams, and public and merit goods. In contrast, private expenditures are approved by firms in the private sector of an economy and have their main motive as profits. Illustrations of these expenditures include: setting up a factory or expansion of a profitable outlet.
- A public expenditure is financed by the taxpayer, whereas a private expenditure is financed by an individual or a group of investors aiming, generally, to make a profit.
Types of Goods
The difference between national defence and a burger, as a layman would see, is that the former is free while the latter has a price. But this is not the only difference. National defence is an example of a public good, whereas a burger is a private good.
1. Public Good
Samuelson describes it as one “which all enjoy in common in the sense that each individual’s consumption of such a good lead to no subtraction from any other individual’s consumption of that good”. In short, a public good is non-rival in consumption. Another defining feature of public good is that of non-excludability, which means that preventing anyone from consuming the good is either very expensive or impossible.
2. Private Good
Private goods are rival in consumption in the sense that if one individual consumes a good, the same good cannot be consumed by another person. They also possess the property of excludability, which means that if one individual buys a good, it gives him/her the right over it, and the same good cannot be purchased by some other individual.
The provision of public goods through the market is inefficient because they possess the property of non-excludability, and if people cannot be excluded, it will deprive the firms of their profits. Hence, there is no incentive for the private firms to provide these goods. As a result, the government has to step in for the provision of these goods.
Read More in: Theory of Public Finance
- Public Finance: Meaning, Nature & Scope
- Role of Government in Economy
- Role of Government in Mixed Economy: Public & Private Sector
- Role of Government under Cooperation and Competition
- Role of Government in Economic Development and Planning
- Concept of Public Goods, Private Goods, and Merit Goods
- Concept of Market Failure and Functions of Government
- Market Failure and Functions of Government: Decreasing Costs
- Market Failure and Functions of Government: Externalities
- Market Failure and Functions of Government: Public Goods
- Future Market: Meaning, Role & Uncertainty
- Concept of Information Asymmetry
- Theory of Second Best: Concept & Explanation
- Problem of Allocation of Resources: Public & Private Mechanisms
- Preferences: Meaning, Types & Problems of Preference Revelation
- Preference Aggregation & Its Mechanism
- Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
- Economic Theory of Democracy: Concept & Explanation
- Politico Eco Bureaucracy: Concept & Explanation
- Rent-Seeking and Directly Unproductive Profit-Seeking Activities
- Rationale for Public Goods: Concept & Explanation
- Benefit Theory or Voluntary Exchange Theory
- Lindahl Model: Concept, Equilibrium & Limitations
- Bowen Model: Concept, Advantages & Limitations
- Samuelson’s Model of Public Expenditure
- Musgrave’s Model of Public Expenditures
- Demand Revealing Schemes for Public Goods
- Vickery-Clarke-Groves Mechanism
- Groves-Ledyard Mechanism
- Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
- Theory of Club Goods
- Keynesian Principles of Stabilization Policy
- Difference Between Keynesian Economic Thought and Others
- Role of Expectations and Uncertainty in Formulating Stabilization Policy
- Intertemporal Markets Efficiency & Failure
- Liquidity Preference Theory
- Diamond-Dybvig Banking Model
- Preference Shocks, Adverse Selection & Central Bank
- Equilibrium Deposit Contract
- Social Goods and Its Effect on Stabilization Policy
- Effect of Infrastructural Facilities on Stabilization Policy
- Effect of Distributional Inequality on Stabilization Policy
- Effect of Regional Imbalances on Stabilization Policy
- Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
- Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
- Public Expenditure: Concept, Objectives & Public vs Private Expenditure
- Pure Theory of Public Expenditure
- Structure & Growth of Public Expenditure in India
- Trends, Lessons & Priorities in Public Expenditure in India
- Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
- Performance Based Budgeting and Zero Based Budgeting
- Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
- Tax System and Its Principles
- Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
- Ability to Pay and Benefits Received Principle of Taxation
- Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
- Deadweight Loss of Taxation: Causes, Measurement & Example
- Concept of Equity & Efficiency in Economics
- Trade-Off Between Equity and Efficiency: Meaning & Example
- Theory of Measurement of Dead Weight Loss
- Double Taxation: Meaning, Desirability, Forms & Solution
- Solution to Problem of Double Taxation: Intra-Country & International
- Double Taxation Avoidance Agreement (DTAA) and Indian Policy
- Classical View on Public Debt
- Compensatory Aspect of Public Debt Policy
- Public Debt or Borrowings: Concept, Need, Sources & Types
- Concept of Public Debt or Public Borrowings
- Need for Public Debt or Public Borrowing
- Sources of Public Debt
- Classification of Public Debt
- Burden of Public Debt: Meaning, Types & Explanation
- Debt Through Created Money or Deficit Financing
- Public Debt (Public Borrowings) and Inflation (Price Level)
- Crowding Out of Private Investment and Activity
- Principle of Public Debt Management and Debt Repayment