Public finance is the field of economics that analyzes

government taxation and spending policies.

Allocative efficiency - state of the economy in which
production represents consumer preferences - the
producers produce up to the level to fulfill the
consumers demand
Income distribution how total GDP is distributed
amongst its population.
Macroeconomic stabilization- condition which
envisages establishing a framework for monetary
and fiscal institutions and policies to reduce volatility
and encourage welfare-enhancing growth.
Government expenditures
Economists classify government expenditures
into three main types.
Government consumption Government
purchases of goods and services for current use.
Government investment - purchases of goods
and services intended to create future benefits
Transfer payments - Government expenditures
that are not purchases of goods and services, but
represent transfers of money -closely connected
to issues of income distribution and social equity.
Public revenues
Government expenditures are financed primarily
in three ways:
1.Government revenue(Taxes, excises, tariffs
(duties) fees ,Non-tax revenue (revenue from
Government corporations , sovereign funds ,
sales of assets)
2.Government borrowing
3.Printing of Money or inflation
Budget deficit vs. public debt
A deficit is the difference between government
spending and revenues. The accumulation of
deficits over time is the total public debt.
Deficit finance allows governments to smooth
tax burdens over time, and gives governments
an important fiscal policy tool.
A positive externality exists whenever
producers or consumers do not receive
payment for a benefit they generate.
A negative externality exists whenever
producers or consumers do not have to
pay for a cost they generate.
A public good has two properties:
1.non excludability and 2) non rivalry.
Non excludability means that it is
hard to exclude any person from benefiting
from the good or service even if the person
wont pay for it.
Non rivalry means that consumption of the
good or service by one person does not
prevent consumption of the good by other
people; in fact, all individuals simultaneously

consume the same quantity of the good.

Excludability -it is easy to exclude a person
from benefiting from the good or service if the
person refuses to pay for it, and
Rivalry -consumption of the good by one
person prevents consumption by other people.
A private good is consumed by only one person.
Cost-benefit analysis -measuring of the costs
of a project and the benefits of a project to help
decide whether to undertake the project and
what the scale of the project should be.
Government-cost benefit
Government invests in infrastructure, such
as roads and bridges.
The cost of the highway has two components:
Construction costs (e.g., labor, equipment, and
asphalt) and Future maintenance (repair) costs.
There are at least three ways for the cost-benefit
analyst to estimate the benefit to commuters:
Increased output, ,Actual market behavior
(revealed preference), and Hypothetical
questions and answers (contingent valuation) .
Mistakes which make us to overestimate benefits.
1. Counting Job Creation as a Benefit
Cost-benefit evaluation of a project shouldnt count as
a benefit the jobs created - labor used in the project
should be counted as a cost, not a benefit.
2.Double Counting the Same Benefit
The value of time saved by building a highway should
be counted as a benefit, but it would be double
counting to add the rise in value of the suburban homes.
3.Counting Secondary Benefits
Benefits should be measured as the amount that direct
users of the project would be willing to pay for its use.
What shouldnt be counted are indirect secondary
benefits to individuals and business firms that do not
use the highway

Public expenditure is spending made by the government

of a country on collective needs
Forms of Public Expenditure
1.Government consumption - Government purchases of
goods and services for current use.
2. Public /Government investment Government
purchases of goods and services intended to create
future benefits such as infrastructure investment
or research spending
3. Transfer payments - Government expenditures that
are not purchases of goods and services, and instead

just represent transfers of money such as social

security payments , pension
The Role of Public Expenditures
1.it contributes to current effective demand;
2. it expresses a coordinated impulse on the
economy, which can be used for stabilization, business
cycle inversion, and growth purposes;
3. it increases the public donationof goods for
everybody;
4. it gives rise to positive externalities
to economy and society as a whole
Classification of Public expenditures
Organizational classification classification by budget
Users.Economic classification classification upon
revenues and inflows and expenditures and outflows
(current expenditures : wages and benefits, goods
and services )Functional classification classification
of the revenues regarding the functions of the central
government according to UN classification
Programme classification according to budget
programmes and sub programmes
General models of state
1.the minimal state, where only justice, public order,
foreign policy and some other basic functions should
be carried out by the state, relying on private initiative
for the others;
2. the welfare state, where the State cares about the
people's well-being directly, also through expenditure
in schooling, health, support for the poor, the old,
the disadvantages;
3. the developmental state, where the State takes the
responsibility of fostering economic development, also
through expenditure in infrastructure, support for
firms, innovation, export and production in general.

Public expenditures side effects

waste and resource disaggregation
,duplicative employment of low-productive bureacrats,
,boosted quotations in tenders,
,leading to super-normal profits of the few selected firms,
,generation of the incentive for corruption.
Transparency and public monitoring of prices of the goods
purchased by public authorities can substantially increase
the efficiency and the consensus around public
expenditure.