are of good

public
Xandpoints G represents best p hce for A. The two pOints 1 and Q as in Fig. 7.4,
this kind and a curve AA' obtained by pairs all such points is a curve showing
preferred values for various cost shares. This curve is redrawn in Fig. 7.5 as AA! for
most Ba smaller curve is labelled as BB'. Their interaction takes place at point P.
A. For
Eie 7.5, the dashed indifference curves show combinations of public good output (C)
contributed by A(i.e., h) among while taxpayer Ais indifferent. Similarly.
and cost shares
indifference curves are drawn for the taxpayer B. The line Ww' is the contract curve
of the points at which the two sets of indifference curves are tangent.
showing the locus find the most preferred position because it liesoAA', BB', i, and also
Only at point P we P point is only one of the many Pareto optipat solutions. It is so because
For Johansen, this several pOints on the contract curve wN'
p is only one of the
B. GENERAL THEORIES OF PUBLIC EXPENDIURE
There are three important theories of incTeasing public expenditure given by
(i) Adolph Wagner, (ii) Wiseman, (ii) Peacock and Colin Clark. We shall now explain these
theories in detail.
HYPOTHESIS
1, ADOLPH WAGNER a functional
Adolph Wagner, a famous German fiscal theorist believed that ther is
and the relative growth
e and effect relationship between the growth of an economy state activities', Adoph
"Law of the increase of
f Dublic sector. Presenting his famous
Wagner opines ;
different times show that amona
"Comprehensive comparisons of different countries and an increase regularly takes place
progressive people, with which alone we are concerned,
in the activity of both the central and local governments. This increase is both extensive and
undertake new functions, while-they
intensive: the central and local governments Constantty completely." Adolph Wagner
perform both old and new' functions more efficiently and
According to Wagner, relative growth of theonly government sector was an inherent
characteristics of industrialising economics. He not mentioned the United Kingdom
revolution before Wagner's time but also
which more or tess trad compteted her industrial
and Japan whose industrial revolutions were
nations such as the USA, France, Germany that
of inereasing state activity holdsthese
contemporary to Wagner's life. Wagner's hypethesis industrial nations, the public sector of
as per capita income and output increase in thetotal economic activity. Wagner has dividel
proporion to
nations necessarily grows as apartsZà
expenditure into tWo expenditure for internal and external security)
public health, transport, education, banking and the like.
culture and welfare which implies increase in a growing economy as the nature of use of
Expenditure for external security would sophisticated
to prevention of attack and use of
force by the state from simple aggressioninternal
weapons. Similarly, the expenditure for frietien OUTPUT (Rupees)
Y
security.would increase due to greater
between economic units and urban people.
1000
GOODS
Wagner's Hypothesis with the help of CAPITA
Diagram
This has been shown in Fig. 7.6. The realper PUBLIC
600
capita income has been shown on the X-axis and PER A
the real per capita output ofpublic goods has 400
been shown on the Y-axis. REAL
OF
Line A', represents asituation in whichthe 200
public sector maintains a constant proportion
of the total economic production of society Qver 600 800 1000
X
time. In other words while the real per capita 200 400
INCOME (Rupees)
Tncome increases due to the economuc REAL PER CAPITA
development of the country, the real per capita Fig. 7.6.
Output of public goods remains at the constant
proportion of total economic activity. The
 90

constant proportion line may now be used as a reference point to the

PUBLIC FINANCE
of Wagner's lawas shown by the line A2_again alongwith the ine A2presentation
totalresources devoted to the Qutput of public goods, expanding overthetime. proportion
of the
Factors Responsible for Persistance increase in Public Expenditure
Wagner's hypothesis was supported by the famous economist F.S. Nitti. He concld.
with the subject of empirical evídence that this law was applicable not only to
but also to various governments which differed
widely from one another. All kinds
8Overnments-irrespective of their type of governments, size had
of inereasing public expenditure. According to Wagner shown the same Germany
hypothesis,
which are responsible for persistent increase in public expenditure.there are many facto tendency
They are as under :
1. Continuous Extension of Social Activity. Wagner admitted that
of social activities was the basic reason of the relative growth of public continuous
expenditures l extension
past, governments restricted themselves to the problems of external defence
and
oldmai-fashintenance
of law and order within the country. But in the modern and
dynamic world,
concept has changed altogether and new govenments are assigned with the
objective f
promoting economic, political and social well being of its citizens. Besides, they
their functions in the removal of all business fluctuations, perf
oned
maintaining full employment in
acountry. Thus, growth of these government functions lead to absolute and relative
of economic activity. growth
2. War and Preparation for War. In the
factor in pushing public expenditure upwardpresent
is war.
century, the most important single
Expenditure for national defence
accounts for half of the total expenditure. Wars and rumours of War betWeen countries
forced them to remain ready for it all the times. Therefore, progress
goods has been so rapid that the war goods have been extremely costly in the art of military
affair in recent times.
3. Growth of Population and Urbanisation. The growth of
is another factor responsible for the rise of public population and urbanisation
expenditure,
activities. Thus, the process of urbanisation seeks an expansion ininsuch turn, governmental
expenditures as
those of protection of life and property. This imposes additional responsibilities
government. The functions, they perform are inspection of food, distribution of upon the
essential
Commodities, promotion of public health, construction and maintenance of hospitals.
education and other amenities of life. Furthermore, modern societies are
complex which need huge amount of expenditure to meet their demands. becoming more
4. World Depression. The great world depression of 1929-33 is another major factor
responsible for the extension of publicexpenditures. This depression demonstrated the need
for government intervention which is responsible for the growth of government activities
in various fields. So investment activities of modern governments constitute another
for increased public expenditures. factor
5. Rise in Prices. The sky rocketing rise in prices has equally contributed to the rise in
the public expenditure since independence. The rise in prices has two effects. One, the
government has to pay higher price for all goods and services which it _has to buy. Two,
has to find larger financial resources to meet its growing expenditure) In this way. the
increased government expenditure is itself one of the contributory factors responsible tor te
secular rise in prices.
6. Dem0cratic Institutions. Democratic institution is not the direct factor responsile
for pushing public expenditures. But it makes indirect influence upon it. Amodern democratic
state has to maintain the ceremonial head of the state and it incurs expenditure on legS
at the central, state and even local levels. Above all, they have to maintain diplomatic and
consular relations with rest of the world. It will not be out of place to note the increasin
concern for underdeveloped nations felt by the advanced countries which have state
nations. Itis.
diverting part of their resources for economic development of these backward factor forthe
therefore, whatsoever the real cause, these activities constitute very important
increased public expenditure in the 20th century. a0doptad
7. Role of Economic Planning. In almost all countries, the state government
Substantial
the planning in any form to accelerate the pace of economic growth. This has
ncreased the expenditures.
 EXPENDITURE 91
PUBLIC
THEORYOF,
Complexities of Life. The fast growing complexities of modern life betterment
Modern
compelled
in hand qualitative and quantittive functions for the
8.
governmentto takewelfare schemes of the government, naturally involve massive public
commonlots. These
the
of
eypenditure. Sector.
Public
9. Role of ector is also the factor to stimulate public expenditure
public sector
efficiency of
"Increased private organisation. It is well known fact that individual private organisation
the social
of
relativelyto for maximum profit whereas public sector exclusively works forProf. Dalton
that
always looks country."
advantage of the
Theory
Criticism of the
hypothesis was widely criticised by noted
economists such as Allan Peacock
Wagner's
Wiseman on the following grounds
andJack Inter-disciplinary Relationship. No doubt, it deals with inter-disciplinary
1It lacks lacks essentially inter-disciplinary relationship in itsbe analytical
phenomenon but basically it economics and sociology must evolved
science,
amework. Other sciences likep0litical Such type of theories must consider cultural
any theory of public expenditure.
Therefore, it deals with the casual conditions described by
characteristics of a society. a relatively expanding public
which constitutes all the primary determinants of growth.
Wagner and economic
sector during the course of industrialisation
Although Wagner's hypothesis possesses the
2. Not Comprehensive Analysis.historical facts, it lacks a comprehenisive analytical
accumulating and explaining the crucial
framework.
version is based on an organicself
3. Not Acceptable to Western Countries. Wagner's least accepted in most western
determining theory of the state which is not, however, at
countries.
hypothesis ignores the influence of war
4. It Ignores the Influences of War. Wagner'sa vital
on government's spending activities which play role in the public expenditure in
modern times.
2. PEACOCK-WISEMAN HYPOTHESIS