ROLE OF THE GOVERNMENT IN PUBLIC FINANCE.pptx

public finance

1. ROLE OF THE GOVERNMENT CONTENTS: CHARACTERISTICS OF PUBLIC GOODS ROLE OF THE GOVERNMENT IN PROVIDING PUBLIC GOODS PRINCIPLES OF SOUND FINANCE AND FUNCTIONAL FINANCE

2. The definition of a public good Economists have a strict definition of a public good, and it does not necessarily include all goods financed through taxes. To understand the defining characteristics of a public good, first consider an ordinary private good, like a piece of pizza. A piece of pizza can be bought and sold fairly easily because it is a separate and identifiable item. However, public goods are not separate and identifiable in this way.

3. A public good has two key characteristics: it is nonexcludable and nonrivalrous . These characteristics make it difficult for market producers to sell the good to individual consumers. Nonexcludable means that it is costly or impossible for one user to exclude others from using a good. Nonrivalrous means that when one person uses a good, it does not prevent others from using it.

4. ROLE OF GOVERNMENT IN PROVIDING PUBLIC GOODS OVERCOMING FREE-RIDER PROBLEM NON-RIVAL NATURE SUPPORTS THE GOVERNMENT PROVISION OF MORE PUBLIC GOODS STATE PROVISION EFFICIENCY

5. 1 . Say's Law Like many other classical principles, the prince of sound finance is also based on Say's Law, that is, supply creates its own demand." Since one man's expenditure another man's income, aggregate demand will always be equal to aggregate supply. This belief forms the base of the argument on which classical economists argued in favour of sound finance . 2. Full employment The classical economists argued that since AD = AS, there cannot be over-production and under of consumption. In other words, the economy cannot suffer from fluctuations like unemployment and inflation . Driven by profit motive, the private sector will ensure optimum use of resources 3. 'Invisible hand ' Private owners of factors of production will always achieve maximum level of efficiency in their use of resources, as they are driven by self-interest and profit motive.

6.    4. Taxation According to the classical school of thoughts, taxes are harmful because they adversely affect willingness and ability to work, save and invest. Taxation was expected to be kept at a minimal limit. High progressive taxation will lead to slow economic progress. They believed that taxes should not be used to redistribute income. 

7. 5. Public expenditure Government spending was expected to be in the traditional areas like defence , law and order, justice and provision of civic amenities. Since government budget was not expected to be large in size, government spending was not large relative to total spending in the economy.  6. Balanced budget In laissez faire capitalism, since all factors of production are normally owned and used by private individuals, the government can make use of such factors only by depriving the private sector Expenditure incurred by the government would not increase total demand for factors of production as there is already full employment . 7. Market efficiency The market mechanism is assumed to achieve maximum level of efficiency. Market failures are only temporary and the market is fully capable of correcting itself. Therefore there is no justification of any government regulation and restrictions on the market.

8. Functional finance Functional finance is a macroeconomic theory developed by economist Abba Lerner during World War II that promotes government intervention in the economy. Functional finance promotes deficit spending to reduce unemployment, controlling consumer spending through tax policy, and controlling interest rates, inflation, and the cash flow through the economy. Lerner was a Russian-born, British-raised scholar, professor, follower, and interpreter of famed economist John Maynard Keynes. Keynes was a proponent of government intervention to create an optimal economic environment.

9. Functional finance is based on three major beliefs: It is the role of government to stave off inflation and unemployment by controlling consumer spending through the raising and lowering of taxes. The purpose of government borrowing and lending is to control interest rates, investment levels, and inflation. The government should print, hoard, or destroy money as it sees fit to achieve these goals.