Public Expenditure: Concept, Objectives & Public vs Private Expenditure

Definition & Concept of Public Expenditure

The spending done by the government of a country on the collective needs of the citizens is called public expenditure. The government incurs this expenditure to provide the goods and services that the competitive market would not be willing to provide. Public expenditure for goods and services can be considered as a means of supplying services in appreciable quantity that would not have been possible through the market.

In practice, the government needs to spend in order to run the government to serve society and protect the people from foreign aggression. Public Expenditure shows the decision of the Parliament and other independent executive bodies for the scope of public expenses. It is measured with respect to the public expenses made by the government in the previous year or last financial interval.

Objectives of Public Expenditure

Public expenditure is not only a financial mechanism, but it also aims at acquiring social objectives. The major objectives of public expenditure include:

• Administration of law, order, and justice
• Maintenance of police force, army, and provision for defence goods
• Public administration
• Servicing of public debt
• Development of industries, transport, and communication
• Provision of public health, healthcare and education
• Promotion of socio-economic welfare of the citizens

Difference Between Public and Private Expenditure

It is well acknowledged that there is a resemblance between public & private expenditure. Neither the public nor the private individual likes to incur expenditure without any return. Both public as well as private expenditure possesses the element of flexibility.

Also, in each case, there can be more than one way of raising additional resources. Contrary to this, there are also points of difference between the two. The main points of difference between public and private expenditure can be summarised as follows:

• Public expenditure is a type of spending usually done by firms in the public sector or govt organizations; examples include the building of schools, dams, and public and merit goods. In contrast, private expenditures are approved by firms in the private sector of an economy and have their main motive as profits. Illustrations of these expenditures include: setting up a factory or expansion of a profitable outlet.
• A public expenditure is financed by the taxpayer, whereas a private expenditure is financed by an individual or a group of investors aiming, generally, to make a profit.

Types of Goods

The difference between national defence and a burger, as a layman would see, is that the former is free while the latter has a price. But this is not the only difference. National defence is an example of a public good, whereas a burger is a private good.

1. Public Good

Samuelson describes it as one “which all enjoy in common in the sense that each individual’s consumption of such a good lead to no subtraction from any other individual’s consumption of that good”. In short, a public good is non-rival in consumption. Another defining feature of public good is that of non-excludability, which means that preventing anyone from consuming the good is either very expensive or impossible.

2. Private Good

Private goods are rival in consumption in the sense that if one individual consumes a good, the same good cannot be consumed by another person. They also possess the property of excludability, which means that if one individual buys a good, it gives him/her the right over it, and the same good cannot be purchased by some other individual.

The provision of public goods through the market is inefficient because they possess the property of non-excludability, and if people cannot be excluded, it will deprive the firms of their profits. Hence, there is no incentive for the private firms to provide these goods. As a result, the government has to step in for the provision of these goods.

Read More in: Theory of Public Finance

1. Public Finance: Meaning, Nature & Scope
2. Role of Government in Economy
3. Role of Government in Mixed Economy: Public & Private Sector
4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
7. Concept of Market Failure and Functions of Government
8. Market Failure and Functions of Government: Decreasing Costs
9. Market Failure and Functions of Government: Externalities
10. Market Failure and Functions of Government: Public Goods
11. Future Market: Meaning, Role & Uncertainty
12. Concept of Information Asymmetry
13. Theory of Second Best: Concept & Explanation
14. Problem of Allocation of Resources: Public & Private Mechanisms
15. Preferences: Meaning, Types & Problems of Preference Revelation
16. Preference Aggregation & Its Mechanism
17. Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
18. Economic Theory of Democracy: Concept & Explanation
19. Politico Eco Bureaucracy: Concept & Explanation
20. Rent-Seeking and Directly Unproductive Profit-Seeking Activities
21. Rationale for Public Goods: Concept & Explanation
22. Benefit Theory or Voluntary Exchange Theory
23. Lindahl Model: Concept, Equilibrium & Limitations
24. Bowen Model: Concept, Advantages & Limitations
25. Samuelson’s Model of Public Expenditure
26. Musgrave’s Model of Public Expenditures
27. Demand Revealing Schemes for Public Goods
28. Vickery-Clarke-Groves Mechanism
29. Groves-Ledyard Mechanism
30. Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
31. Theory of Club Goods
32. Keynesian Principles of Stabilization Policy
33. Difference Between Keynesian Economic Thought and Others
34. Role of Expectations and Uncertainty in Formulating Stabilization Policy
35. Intertemporal Markets Efficiency & Failure
36. Liquidity Preference Theory
37. Diamond-Dybvig Banking Model
38. Preference Shocks, Adverse Selection & Central Bank
39. Equilibrium Deposit Contract
40. Social Goods and Its Effect on Stabilization Policy
41. Effect of Infrastructural Facilities on Stabilization Policy
42. Effect of Distributional Inequality on Stabilization Policy
43. Effect of Regional Imbalances on Stabilization Policy
44. Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
45. Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
46. Public Expenditure: Concept, Objectives & Public vs Private Expenditure
47. Pure Theory of Public Expenditure
48. Structure & Growth of Public Expenditure in India
49. Trends, Lessons & Priorities in Public Expenditure in India
50. Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
51. Performance Based Budgeting and Zero Based Budgeting
52. Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
53. Tax System and Its Principles
54. Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
55. Ability to Pay and Benefits Received Principle of Taxation
56. Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
57. Deadweight Loss of Taxation: Causes, Measurement & Example
58. Concept of Equity & Efficiency in Economics
59. Trade-Off Between Equity and Efficiency: Meaning & Example
60. Theory of Measurement of Dead Weight Loss
61. Double Taxation: Meaning, Desirability, Forms & Solution
62. Solution to Problem of Double Taxation: Intra-Country & International
63. Double Taxation Avoidance Agreement (DTAA) and Indian Policy
64. Classical View on Public Debt
65. Compensatory Aspect of Public Debt Policy
66. Public Debt or Borrowings: Concept, Need, Sources & Types
67. Concept of Public Debt or Public Borrowings
68. Need for Public Debt or Public Borrowing
69. Sources of Public Debt
70. Classification of Public Debt
71. Burden of Public Debt: Meaning, Types & Explanation
72. Debt Through Created Money or Deficit Financing
73. Public Debt (Public Borrowings) and Inflation (Price Level)
74. Crowding Out of Private Investment and Activity
75. Principle of Public Debt Management and Debt Repayment