Role of State in Economic Activities

Public Finance

1. The Role of State in Economic Activities

2. Classical School of Philosophy Marxian View Keynesian View Role of State in Indian Ecnomy

3. Role of State According to Professor Musgrave there are three major fiscal or budgetary functions of the governments a) Allocation functions b ) Distribution functions and c ) Stabilization functions.

4. THE ALLOCATION FUNCTION There are certain cases in which the wants of all individuals cannot be satisfied through market mechanism. In such cases the public sector or the governments have to provide goods and services. The allocation branch of public finance deals with the provision of social goods . Social goods are those goods and services produced to satisfy collective wants . Collective wants are those wants which are demanded by all members of the community in equal or more or less equal amounts

5. THE DISTRIBUTION FUNCTION The very important feature of a market economy is the disparity in the distribution of income and wealth. The distribution function of public finance deals with the adjustment of the distribution of wealth and income to ensure “fair or just” state of distribution. That is , the distribution function of public finance deals with the determination of taxes and transfer payments policies of the governments

6. THE STABILIZATION FUNCTION T he stabilization function deals with the use of budgetary policy as a means of maintaining high employment, a reasonable degree of price stability and an appropriate rate of economic growth, with allowances for effects on trade and balance of payments . The major instruments of stabilization policy are monetary policy and fiscal policy. This function is otherwise known as compensatory finance