It is usually necessary to look at the economy from the point of view of the degree of influence and economic resources of the government and of individuals. In this context, we are talking of public and private sectors of the economy.
Public Finance is described as that branch of economics which studies the economic bahaviour of govern- ments. Economics itself is the study of man making decision in a world where scarcity of resources relative to human wants makes choice a necessity. Economists have broadly divided the economy into two related sectors. i.e.
(a) Private Sector and
(b) Public Sector
Though the end problem in both sectors are the same, that is, the satisfaction of human wants, their behaviour and decision making processes vary. Hence their separate treatment in economic analysis.
The public sector refers to all production that is in public hands. That is, in public sector, the organisation that produces goods and services is owned by the state. It is thus a combination of control, government, state government, local authorities, the nationalised industries, public corporations, government administration, de- fence and similar public service, including commercial and non-commercial undertakings of the government. Some public sector activities are in the form of “nationalised industries” put differently, this sector is that portion of the economy whose activities (economic and non-economic) are under the control and direction of the Federal/State/Local Government.
The private sector refers to that part of the economy not under direct government control. It entails all production that is in private hands. There, the organisation that carries out the production is owned by house- holds or other firm. Beyond the productive activities of private enterprises (the sole Proprietorship, Partner- ship, Private Limited Liability Company, Public Limited Company and Cooperative Societies), the private sector also includes the economic activities of non-profit-making organisation and private individuals. Put differently, this sector is that part of an economy whose activities are under the control and direction of non- governmental economic unit such as households and firms.
Modern private economy is market oriented and operates on the principles of economic efficiency con- sumer preference and market exclusion. This implies that resources should flow to where they are most economically efficient and are appropriately rewarded. Price mechanism rations the scarce goods to the consumers whose preferences are expressed through the market forces of demand and supply. Thus the problem of relative scarcity is solved by excluding buyers who cannot buy and sellers who cannot sell at the market price.
Modern public economy on the other hand organises its own want satisfying activities on the budget instead of the market. Though the budget contains the priority list of public goods, the solution to the problem of scarcity is determined by the political system.
Public Finance is described as that branch of economics which studies the economic bahaviour of govern- ments. Economics itself is the study of man making decision in a world where scarcity of resources relative to human wants makes choice a necessity. Economists have broadly divided the economy into two related sectors. i.e.
(a) Private Sector and
(b) Public Sector
Though the end problem in both sectors are the same, that is, the satisfaction of human wants, their behaviour and decision making processes vary. Hence their separate treatment in economic analysis.
The public sector refers to all production that is in public hands. That is, in public sector, the organisation that produces goods and services is owned by the state. It is thus a combination of control, government, state government, local authorities, the nationalised industries, public corporations, government administration, de- fence and similar public service, including commercial and non-commercial undertakings of the government. Some public sector activities are in the form of “nationalised industries” put differently, this sector is that portion of the economy whose activities (economic and non-economic) are under the control and direction of the Federal/State/Local Government.
The private sector refers to that part of the economy not under direct government control. It entails all production that is in private hands. There, the organisation that carries out the production is owned by house- holds or other firm. Beyond the productive activities of private enterprises (the sole Proprietorship, Partner- ship, Private Limited Liability Company, Public Limited Company and Cooperative Societies), the private sector also includes the economic activities of non-profit-making organisation and private individuals. Put differently, this sector is that part of an economy whose activities are under the control and direction of non- governmental economic unit such as households and firms.
Modern private economy is market oriented and operates on the principles of economic efficiency con- sumer preference and market exclusion. This implies that resources should flow to where they are most economically efficient and are appropriately rewarded. Price mechanism rations the scarce goods to the consumers whose preferences are expressed through the market forces of demand and supply. Thus the problem of relative scarcity is solved by excluding buyers who cannot buy and sellers who cannot sell at the market price.
Modern public economy on the other hand organises its own want satisfying activities on the budget instead of the market. Though the budget contains the priority list of public goods, the solution to the problem of scarcity is determined by the political system.
Students Assessment Exercise
- Differentiate the “Private” from the “Public” Sector.
Objectives /Functions of Public Finance
Traditionally, public finance serves three major functions: Allocation, Stabilisation and Distribution functions. (a) Allocation function of Public Finance
Public Finance, traditionally ensures the provision of special goods as well as ensures that total re-
sources use is divided between social and private goods. It also ensures a proper mix of social goods
provision. Through its Public Finance activities, government allocates the productive resources of government to their optimal use. It determines for instance how much of the resources should go to the production of consumer or producer goods. Besides and very importantly, the government ensures that resources are allocated to the production of public goods (social goods) which otherwise would be neglected by
Public Finance, traditionally ensures the provision of special goods as well as ensures that total re-
sources use is divided between social and private goods. It also ensures a proper mix of social goods
provision. Through its Public Finance activities, government allocates the productive resources of government to their optimal use. It determines for instance how much of the resources should go to the production of consumer or producer goods. Besides and very importantly, the government ensures that resources are allocated to the production of public goods (social goods) which otherwise would be neglected by
the market system.
(b) Stabilisation function of Public Finance
(b) Stabilisation function of Public Finance
Public Finance is a means traditionally used to maintain price stability, high employment, high and
sustainable economic growth and favourable balance of payments. Government through its public finance activities aim at removing or reducing such fluctuations so that
growth can be achieved without serious unemployment and inflation. Every government wants to have a stable economy. Stability here implies stable prices at full employment. Inherent in the economy are forces which could cause fluctuations and thus engender unemployment and stagnation on one hand and inflation and balance of payments disequilibria on the other.
(c) Distribution Function of Public Finance
Public Finance was also used traditionally to promote equality in income and wealth distribution.
This was to ensure the attainment of what society see as a “just or fair” state of distribution in (Musgrave and Musgrave 1989).
The market system guided by the principle of economic efficiency equates the price of a factor with
the value of its marginal product. This system breeds in equalities in income distribution. Through its
public finance activities, government tries to change the market distribution so that a higher level of
equality can be achieved e. g. Government can also use tax revenue to finance the provision of the
social goods free of charge. Examples include free Primary Education, free Primary Health-Care
delivery, etc., which usually benefit the lower income earners.
(i) Public Goods
(ii) Private Goods
Scope of Public Finance 97Goods are said to be o f a public nature if they have the following characteristics:
sustainable economic growth and favourable balance of payments. Government through its public finance activities aim at removing or reducing such fluctuations so that
growth can be achieved without serious unemployment and inflation. Every government wants to have a stable economy. Stability here implies stable prices at full employment. Inherent in the economy are forces which could cause fluctuations and thus engender unemployment and stagnation on one hand and inflation and balance of payments disequilibria on the other.
(c) Distribution Function of Public Finance
Public Finance was also used traditionally to promote equality in income and wealth distribution.
This was to ensure the attainment of what society see as a “just or fair” state of distribution in (Musgrave and Musgrave 1989).
The market system guided by the principle of economic efficiency equates the price of a factor with
the value of its marginal product. This system breeds in equalities in income distribution. Through its
public finance activities, government tries to change the market distribution so that a higher level of
equality can be achieved e. g. Government can also use tax revenue to finance the provision of the
social goods free of charge. Examples include free Primary Education, free Primary Health-Care
delivery, etc., which usually benefit the lower income earners.
Public and Private Goods
A proper understanding of the meaning and scope of public finance will benefit greatly from the knowledge of the existence of public and private goods, the difference thereof, and the corresponding roles of private and public institutions in supplying them. Broadly, goods and services consumed in a given economy are divided into two viz:(i) Public Goods
(ii) Private Goods
Scope of Public Finance 97Goods are said to be o f a public nature if they have the following characteristics:
- Indivisibility: The use of such commodities is not divisible in the sense that each individual has access to the entire amount of the commodity under consideration, and the enjoyment of that commodity under consideration by one person does not diminish its availability to other persons. For instance, several persons tune into a particular radio programme without reducing the availability of the programme to several other persons. The major problem associated with indivisible goods is that the cost of producing or supplying them cannot be met voluntarily through the price mechanism. Since the financing of such goods/services is by public expenditure and not through price mechanism, their production supply must be in the hands of the public sector.
- Neighbourhood Effects: This is variously reffered to as spillover effects, third party effects of exter- nalities constitute an integral part of the qualities of pure public goods. By neighbourhood effects, we mean the economic effects on other parties arising from production use of the good. These externalities can be either positive or negative i. e. economic gain or economic loss.
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