Department of Economics

regular program
Course title: Public Finance
Course Code: Econ3122
Chrs: 3
Instructor: Bedasa. T(Ph.D. Student)
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E-mail: trueman725@[Link]
 COURSE CONTENTS

1) Nature and Scope of Public Finance

2) Welfare Economics and Public Finance
3) Public Revenue
4) Public Expenditure
5) Public Budget
6) Public Debt
7) Deficit Financing
8) Fiscal Policy
9) Federal-State Financial Relations In Ethiopia
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 CH. 1 INTRODUCTION TO PUBLIC FINANCE

1.1. Meaning and Scope of Public Finance

The term public finance is a combination of two words
1. Public government/State.
✓ Central government,

✓ State government and

✓ Local governing bodies

2. Finance Money income and expenditure.

 public finance is a study of income and expenditure of the
public authorities.
 Public finance is a field of economics concerned with:
✓ How a government raises money,
✓ How that money is spent and 3

✓ Its effects on the economy and society.

 cont;

1. Adam Smith: PF is the study of nature and principle of state revenue

Public government.
government.
and expenditure.
✓✓ Centralgovernment,
Central government,
2. Prof. Dalton: “public finance is subjects which lie on the
✓✓ State
State governmentand
government and
borderline between economics and politics and concerned with
✓✓ Localgoverning
Local governingbodies
bodies
income and expenditure of public authorities.
Finance
3. Richard MoneyMusgrave, (Economics professor: “The complex of
Money
problems that centers on the revenue-expenditure process of government
income
income and andexpenditure.
expenditure.
is referred to traditionally
• Public
 financeis as
finance thepublic
is fiscal
the finance.”
science
fiscal whichwhich
science impliesimplies
the science
the
of publicoffunds.
science public funds.
3. PE. Taylor: public finance studies the manner in which the
• So public
 public finance
financeisisa astudy
study ofof
income
incomeandand
expenditure
expenditureof the
of
public
the
state raises and authorities
publicspends theand
authorities adjustment
and
resources of one
adjustment
required to thetoother
ofamong
one theorgan.
its other
 Cont’
▪ In summary, Public finance is that branch of economics which
deals with financial activities of the government at national, state
and local levels.
Prof. Dalton categories the scope of public finance into four areas.
1. public revenue

2. public expenditure.

3. public debt and

4. Financial Administration (fiscal system).
5. Economic Stabilization

Scope of public finance

1. Public Revenue: The study of various sources of
government’s income, (e.g. canons of taxation), their
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relatives merits and demerits and their effects on the

2. Public expenditure: the study of the principles and the effects of public expenditure.
✓ On infrastructure,
✓ Defense,

✓ Education, For the growth and welfare of the country.

✓ Healthcare, etc

3. Public debt: studies the causes and the methods of public

borrowing & public debt is managed.
It also deals with the methods of repayments and
managements of public debts.
When public expenditure exceeds public income, the gap is
filled by borrowing money from the financial sectors ie
commercial Banks, IMF, WB, etc.

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4. Financial Administration: the administration of all
public finance i.e:

➢ Public income, i.e

➢ Public expenditure, and . administration public finance

➢ Public debt.

It also studies the policy impact on the social-economic

environment, inter-governmental relationships, foreign
relationships, etc.
5. Economic Stabilization and Growth : Public revenue
and Public expenditure to secure stability in levels of
prices by controlling inflationary as well as 7

deflationary pressures is studied.

 1.2 Public finance and private finance - A comparison

A. Similarities:

(a). Both have the same objective:

✓ Private finance: individual welfare maximization

✓ public finance: community’s welfare maximization.

(b) Rationality: maximization of personal benefits and social
benefits through corresponding expenditure.
(c) Scarcity of Resources: Both have limited resources at their
disposal.
(d) Loans Repayable:
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 Both private and public loans are required to be repaid.
 Dissimilarities
Public Finance Private Finance
Concerned with macroeconomic Concerned with microeconomic
1.

problems problems

2. Aims at promoting the Aims at promoting the private

society’s welfare. consumption or profits
3. serve society generation to concerned with present profits
generation.
4. Source of income: Tax revenue, current income, saving from the
borrowing(Internal & external), past earnings(rent, profit) and
printing of currency notes, etc. borrowings(Internal only).

5. Motive of Expenditure: Individuals and households welfare

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Common social welfare motive. motive.

 Public Finance Private Finance
6. Expenditure: Adjust income Adjust its expenditure to
to expenditure income
7. Time dimension: The focus is primarily focused on fulfillment
on both present and future of present and immediate
Wants. wants.
8. Desirable to have a deficit An individual tries to maintain
budget of a government. a balanced /Surplus budget

9. Public Finance is Transparent maintain secrecy of his accounts.

10. Assessment of outcomes: The The outcome may be measured

outcome has to measured and by profits of business,
evaluated in terms of: social fulfillments of wants of
welfare, economic growth, households.
security, Productivity and
efficiency. 10
 1.3. Functions Of Public Finance
 There are three main functions of public finance as
follows
1. The Allocation Function
There are two types of goods in an economy.
II. public goods.

III. private goods:

public goods.
 The indivisible goods
 Whose benefits cannot be priced, and
 The principle of exclusion does not apply
 The use of such goods by one individual does not
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reduce their availability to other individuals

Characteristics of Public goods

A. Non-rival in consumption: -
→One person’s consumption does not diminish the
amount available to others.
→Once it produced, public goods are available to all in
equal amount.
→MC of providing the public goods to additional
consumers is ZERO.
B) Non-excludable:-
→Once a public good is produced, the suppliers cannot
easily deny it to those who fail to pay.
C. Free-rider problem: -
→People can enjoy the benefits of public goods
whether pay for them or not, they are usually
unwilling to pay for public goods. 12
 II. Private goods

Private goods refer to all those goods and services consumed

by private individuals to satisfy their wants.

Eg, food, clothing, car etc.

Features Private goods

a) Excludable: -

b) Rivalry in consumption: -

c) Revealed Preference: -

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2) TheDistribution Function
Redistribution of income and wealth through
progressive taxation.
3) The Stabilization Function
The stabilization function explains the macroeconomic
aspect of budgetary policy.

4) Increases Employment :

The Governments these days establish, give:

✓ Grants.

✓ Subsidies.

✓ Exemption from excise duty, ales tax etc. 14

 1.3.1 Public Finance in Advanced Economies
 The main problem of industrial or high income economies

a. Stability in business conditions and

b. Maintaining full employment.

 Fiscal policy has, thus come to assume significance as effective

means of stabilization and attaining full employment in advanced
economy.
1.3.2. Public Finance in Developing Economies
The main economic problem is the scarcity (paucity) of:
a. productive resources,

b. capital formation and

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c. investment due to not well developed financial institutions.

The end

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