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Chapter-1 Introduction to Public Finance

Thursday, May
11, 2023
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After the completion of this chapter, your are expected

to:
 Defined public finance and Private Finance
 Identify the scope of public finance
 Compare Public finance and Private finance
 1.1 What is Public and Private Finance?

 Governments, all over the world have started number of public

projects, such as social security, education, health, and other
services of public utilities, which are public expenditure, to
provide such social amenities government requires adequate
income (revenue) through taxation, borrowing (internal and/or
external) and other sources.
 Public and Private Finance: Cont‘d
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 PF deals with how and what different sources the government

gets income, how it spends it and how it controls and
administers its incomes and expenditures.
 Therefore, Public finance is a study of the financial operation of
government (Federal, State and local) or income-expenditure
functions of the government.
 Whereas, Private finance refers to the income-expenditure
phenomenon of an individual or private business firm.
 1.2 Scope of Public Finance
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 Scope of public finance consists of the following parts:

1. Public income or Revenue: Study of raising public revenues and the principles

of taxation.

2. Public expenditure: Study of the principles and the effects of public expenditure.

3. Public debt: Causes and the methods debt as well as how its manage.

4. Financial Administration: this part studies the use of fiscal policy to bring about

economic stability in the country.

 
 1.3 Comparison of Public finance and Private finance
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Similarities:

1. Both concerned for the Satisfaction of Human Wants

 Public finance is concerned with the satisfaction of social or collective
wants.
 Private finance is concerned with the satisfaction of personal or individual
wants.

2. Both individuals and governments borrowings.

 When current incomes < current expenditure.

3. Both private and public have not fixed income.

 Comparison of Public finance and Private finance: Cont’d

Similarities:

4. Both need maximum Advantage

 An individual or a corporation or a private business firm tries to obtain

maximum advantage from his expenditure.

 The government also tries to obtain maximum good of the people by incurring
expenditure on the society

5. Engagement in Similar Activities

 Both the private and public sectors are engaged in activities that involve lots of
purchases, sales and other transactions.
 Comparison of Public finance and Private finance: Cont’d

Similarities:

6. Scarcity of Resources are common for both

 They have unlimited objectives, whereas the resources are limited

7. Problem of Adjustment of Income and Expenditure

 Both the public as well as private sectors face the problem of adjustment of
income and expenditure.
 Comparison of Public finance and Private finance: Cont’d

Dissimilarities:

1. Adjustment approach of Income and Expenditure

 Private calculates his income fist and then decides his expenditure,
whereas The public authorities, first estimate the expenditure (budget)
and then devise methods of raising the necessary amount.

2. Nature of Resources
 Private finance = more or less limited such as current income, saving from
the past earnings and borrowings.
 Public finance = enormous such as tax, borrow from general public and
foreign countries, printing of currency notes etc.
 Comparison of Public finance and Private finance: Cont’d

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Dissimilarities:

3. Motive of Expenditure (Motive)

 The motive of private finance is personal interest or benefit (profit).
 The motive of public finance is social benefit or public welfare

4. Expenditure and Welfare (Long/Short-term Consideration)

 Individual = Spend to maximize his satisfaction of present needs (short-term

or quick returns).

 Government = Spend for welfare of the community, not only the present but
also the future generations or long-term considerations (future generations)
 Comparison of Public finance and Private finance: Cont’d

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Dissimilarities:

5. Secrecy and Publicity

 Private finance = Secrecy or does not like to expose his financial affairs to
others.
 Government = Greatest publicity or publicity strengthens rather than
weakens pubic credit. For example, Budget.

6. Right to Print Currency

 The government has a right to print currency which is legal.
 Private individual does not enjoy such a right.
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