Course Introduction

Dear learner! Well come to the course “Public Finance”. The course will examine the role of
government in the economy. In the course, the justification for government involvement in the
economy, how choices are made about the role of the public sector and the policy implication of
these will be discussed. The course also considers issues such as, public revenue, public
expenditure and public borrowing and the effects of these in the economy. It also examines the
major fiscal functions of the public sector and how public sector activities are divided between
the central and regional states, in federated system of government.
We start the course with an overview of the role of the state in the economy and then use
economic theory and evidences to analyses key areas of government policies.
Public Finance uses the tools of economic analysis you have learnt in micro and macroeconomic
courses. These are predominantly positive economics. It also employs the tools of analysis of
welfare economics, which are predominately normative or involve value judgments or social
preferences. Thus the course involves both normative and positive economic analysis.
The course is divided into two Modules. Module-1 discusses the Definition and Scope of Public
Finance, Public Revenues (Taxes and Non-Tax Revenues), and Public Expenditures. Module-2
covers topics such as, Public Budget, Fiscal Federalism, Public Debt and Fiscal Policies.
In the Modules you will find different learning activities next to each section and self-check
exercise questions at the end of each unit. There are also answer keys with explanations to the
learning activities and the self check exercises.
Course Objectives
Upon completion of the course you should be able to:
 define Public Finance and explain its scopes;
 discuss issues necessitate the public sector to intervene in an economy;
 differentiate the fiscal functions of the central and regional or local governments, in
federal system;
 identify different types of taxes and their effects on economic activities;
 explain how government uses its spending and taxes to influence the economy;
 discuss public budgets and different types of budgeting;
 discuss Deficit Financing and sources and effects of Deficit Fincing;
 explain Public Debt and its effects on present and future generation; and
 explain Fiscal policy instruments and their effects in an economy.

Mudule-1: The Public Sector, Public Revenue and Expenditure

Analysis
Introduction
Dear learner! Well come to the first module of the course “Public Finance”. Public Finance or
the public sector economics is an area of study that is directly related to our day to day lives. It is
all about the taxes we pay, the public transportation we use, the electricity delivered to our home
and the water we drink. It is about the services we get from National defense, Police Force and
Fire Department. It is about disposing of waste materials, clean environment, etc.
Thus, the public sector is required to provide public utilities, to allocate resources, and bring
about ‘fair’ income distribution in society.
To carry out its activities, government mobilizes resources in terms of taxes and none-tax
incomes. It also spends its revenues on public projects; make subsidies to the private investments
with strategic importance to the society and subsidies low income group in the society.
Hence, Public Finance is concerned with justifying the existence of government in economy and
explaining how they can affect economic activities. It explains how the “invisible hand” of the
market is tempered by “visible hand” of government in the mixed economy of both private and
public sectors.
In this Module the above issues are addressed by dividing them into three units; namely
Definition and Scope of Public Finance, Public Revenue Analysis, and Public expenditure
Analysis. At the end of each sub-topic you will find activities that will help you to grasp the
main point (s) in the topic. There is summary of the unit, self-assessment questions, and check
lists at the end of each unit. Answer keys are provided at the end of the Module.
Module Objectives
At the end of this Module you should be able to:
 define Public Finance and explain issues addressed in the course;
 differentiate public finance from private finance;
 discuss about market failure and the need for the public sector to intervene in the
economy;
 discuss different functions of the public sector;
 identify different types of taxes and their effects on economic activities; and
 explain how government uses its spending and taxes to influence the economy.

UNIT-I: Meaning and scope of Public Finance

INTRODUCTION
Dear learner, in this first chapter of the course, you will be introduced to the subject matter of
public finance or public sector economics and related issues.
The division of economic activities between public and the private sector and the level of
influence between the two depends on the relevant economic and socio-political objectives of
a given nation.
In a capitalist economy the main task of providing goods and services is mainly assigned to
the private sector in which individual economic units are motivated by economic rationality
and guided by the market mechanism in their decision-making. Commercial profitability is
the decisive factor in making economic decisions. In such arrangement, the government has
only a limited role to play. A socialist economy, on the other hand, is dominated by the state
sector. In this case, economic activities and decisions of the state are expected to be guided
not by commercial profitability but by the totality of objectives of the society. In this
economic setting, the private sector has a marginal role to play. In between these two
extremes, we have the mixed economy. Most real world economies are mixed economies, in
which both the private and the public sectors, are assigned significant roles, and in which
both sectors are complementing one another, instead of competing.
Objectives:
Upon completion of this unit you should be able to:
 Define public finance;
 Express the nature and scope of public finance;
 Compare and contrast public finance and private finance;
 Identify factors necessitating government interventions into an economy;
 Explain different functions of a state in an economy; and
 Explain the limitation of the public sector.
1.1 Public Finance Definition, Scope and coverage
Section-1: Public finance is one of those subjects which lie on the border between the politics
and economics. The main division in public finance is between public income (revenue) and
public expenditure which forms two symmetrical branches of the subject. In this section we will
discuss the definition, scope and coverage of public finance.
Section Objectives:
 What does public finance studies?
 (you can use the space left below to write your response)
_____________________________________________________________________
Public finance (government finance) is the field of economics that deals with budgeting the
revenues and expenditures of a public sector entity, usually government. Government, like any
other legal entity, can take out loans, issue bonds and invest. Based on the taxing authority of the
entity, they issue bonds such as tax increment bonds or revenue bonds. A bond issued by a public
sector entity may give tax advantages to its owners.
The finance of government includes the raising and disbursement of government funds. It is
concerned with the operation of risks (public treasure). Thus, to the degree that it is the science,
it is fiscal science; its policies are fiscal policies; its problems are fiscal problems.
The study of public finance is solely concerned with the financial aspects of the businesses of the
government. Broadly speaking, the study of public finance include public spending, revenue
raising, borrowing and debt operations and the structural and procedural set up for administrating
them. Thus, it can be broken down into five divisions:
A. Public revenue or income: this part deals with tax and non-tax revenues of government
and principle of taxation;
B. Public expenditure: concerned with the principles and problems related to the
expenditure of public funds;
C. Public borrowing and public debt: this studies method and objectives of public
borrowings , deficit financing and its impact on an economy and management of public
debt and burden of public debt;
D. Public budget: studies public budgets as instrument of securing certain objectives, such
as creating employment opportunity, economic growth with stability, maintaining social
welfare, etc;
E. Economic Stability and Growth: the study of public finance includes fiscal policy of
the government in dealing with economic instabilities and economic growth; and
F. Fiscal Federalism: studies the role of different levels of governments of federally
decentralized nation in the public sector activities.
1.2: Distinction between Public finance and private finance

 What does private finance means?

(You can use the space left below to write your response)

__________________________________________________________________
By private finance we mean the financial problems and policies of an individual economic unit
as compared with those of public authorities.
 Can you try to list the similarities between the two?
(You can use the space left below to write your response)
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
________________________________________________________________

Similarities:
i. Both private and public sectors are engaged in activities involving purchases, sales,
production, exchange, savings, capital accumulation, investment, etc which have the
broad objective of satisfying human needs.
ii. In order to finance the above activities, both individuals and governments raise loans,
when expenditure exceeds revenue, and make payments.
iii. Just as income is not fixed for private business, so also it is not fixed for a government
iv. Private businesses often increase income by first increasing expenditure; so also a
government may borrow in anticipation of tax receipts; it borrows so as to spend with
the objective of increasing national income from which increased tax income can be
expected.

Differences:
The major differences between the two are:
i. The private economic unit has to live within its means. Its deficit budgeting (that is;
spending more than the income) can be only for a limited period and only up to a limit.
However, a state can plan to add to its outstanding debt liabilities, and may also succeed
in doing so;
ii. The state can borrow both internally and externally. But a private economic unit (such as
a firm) cannot raise external loans. In addition, the high credit worthiness of the state
enables it to borrow at the rates much lower than for the private sector;
iii. Governments can create legal tender currency, while the private cannot;
iv. Private economic units are guided by market signals and their own economic interests,
while the public does not depend on profit objectives, rather on social objectives; and
v. It is generally argued that while private economic proceeds by first ascertaining an
income and then determining its expenditure, the government first decides about its
expenditure and then round to seek revenue for it.
Thus, on important points, private and public finance differ from each other. It is not; therefore,
correct to assume that the principles and rules which govern private finance are equally
applicable to public finance.

1.3 Market Failure and the need for State Intervention

 Why is it that a public sector is required in an economy?
(You can use the space left below to write your response.)
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
The problem is that, in real world there is market imperfection and the market
alone cannot perform all economic functions. Public policy is needed to guide,
correct and supplement the market in certain respects. A variety of reasons
explain why this is the case, including the following:
A. The claim that the market mechanism leads to efficient resource use (that is, produces
what consumers want most and does so in the cheapest way) is based on the condition
of competitive factor and product markets. This means, there must be no obstacles to
free entry and that consumers and producers must have full knowledge of the market.
 Government regulation or other measures are needed to secure the free play of
market.
B. The contractual arrangements and exchanges needed for market operation cannot
exist without the protection and enforcement of a governmentally provided legal
system.
C. Even if the legal structures were provided and all barriers to completion were
removed, the production or consumption characteristics of certain goods are such that
these goods cannot be provided for through the market system. This is the issue of
Public goods. Problem of “Externalities”, particularly negative externalities is
another issue which requires solution through the public sector.
D. The market system may not bring about socially desirable income and wealth
distribution.
E. The market system does not necessarily bring high employment, price stability, and
the socially desired rate of economic growth. Public policy is needed to secure these
objectives.
F. The rate of discount used in the valuing of future (relative to present) consumption
may differ as seen from public and private point of view.
These and other limitations of the market system call for corrective or compensating
measures of public policy.
1.3.1: Market failure
 What does market failure means?
(You can use the space left below to write your response.)
__________________________________________________________________
__________________________________________________________________
Market failure is a term used by economists to describe the condition where the allocation of
goods and services by a market is not efficient. The belief that markets can fail is a common
mainstream justification for government intervention in free markets – however, not all
economists believe that market failures occur, or that they are compelling arguments for
government intervention, due to government failure. Economists, use many different models and
theorems to analyze the causes of market failure, and possible means to correct such a failure
when it occurs. Such analysis plays an important role in many types of public policy decisions
and studies.
A market failure can occur for three main reasons.
 First, an agent in a market can gain market power, allowing it to block other mutually
beneficial gains from trade. This can lead to inefficiency due to imperfect
competition, which can take many different forms, such as monopolies, monopsonies,
cartels, or monopolistic competition.
 Second, the actions of an agent can have "side effects" known as externalities, which
are innate to the methods of production, or other conditions important to the market.
Finally, some markets can fail due to the nature of certain goods, or the nature of their
exchange. For instance, goods can display the attributes of public goods or common-
pool resources, while markets may have significant transaction costs, agency
problems, or informational asymmetry.
i. In economics, information asymmetry occurs when one party to a transaction has
more or better information than the other party. (It has also been called asymmetrical
information). Typically it is the seller that knows more about the product than the
buyer, for example pharmaceutical labels. However, it is possible for the reverse to be
true: for the buyer to know more than the seller. Information asymmetry models
assume that at least one party to a transaction has relevant information whereas the
other(s) do not. Some asymmetric information models can also be used in situations
where at least one party can enforce, or effectively retaliate for breaches of, certain
parts of an agreement whereas the other(s) cannot.
ii. A common-pool resource (CPR), alternatively termed a common property
resource, is a particular type of good consisting of a natural or human-made resource
system, the size or characteristics of which makes it costly, but not impossible, to
exclude potential beneficiaries from obtaining benefits from its use. Unlike pure
public goods, common pool resources face problems of congestion or overuse,
because they are subject to depletion. A common-pool resource typically consists of a
core resource, which defines the stock variable, while providing a limited quantity of
extractable fringe units, which defines the flow variable. While the core resource is to
be protected or entertained in order to allow for its continuous exploitation, the fringe
 units can be harvested or consumed. In general, all of these situations can produce
inefficiency, and a resulting market failure.
Example of common pool resources include, community owned grazing ground, a
lake where fishes are communally harvested, community owned forest, etc.
iii. In economics, an externality is a cost or benefit resulting from an economic
transaction that is borne or received by parties not directly involved in the transaction.
Externalities can be either positive, when an external benefit is generated, or negative,
when an external cost is imposed upon others. It is a form of side effect though not
necessarily an intended consequence.
A. Examples of negative externalities (external cost or external diseconomy)
include:
 Pollution by a firm in the course of its production which causes nuisance or harm
to others.
Note: In the cause of negative externality, if the production of a good is left to the market
system the market will over produce the good and in the case of positive externality the
good will be under produced, than what is desired by the society.
ii. A music shop near residential area can cause sound pollution to the people
living in the area.
B. Examples of positive externalities (beneficial externality, external benefit,
external economy, or Merit goods) include: bee hives, attractive garden,
invention, etc.
i. A beekeeper keeps the bees for their honey. A side effect or externality
associated with his activity is the pollination of surrounding crops by the bees.
The value generated by the pollination may be more important than the value
of the harvested honey;
ii. An individual planting an attractive garden in front of his house may provide
benefits to others living in the area, and even financial benefits in the form of
increased property values for all property owners;
iii. Iinvention and information - once an invention (or most other forms of
practical information) is discovered or made more easily accessible, others
benefit by exploiting the invention or information.
1.3.2: Public goods and market failure:
 What are Public Goods?
(You can use the space left below to write your response.)
__________________________________________________________________
_________________________________________________________________
Public goods are goods which can be made equally available to all and which
cannot be sold on the profit making basis.
 What are the characteristics of public goods?
(You can use the space left below to write your response.)
_____________________________________________________________________
_____________________________________________________________________
____________________________________________________________
Public Goods are characterized by:
i. Nonappropriability – once public goods are made available, they are equally
available to all individuals and hence its consumption by one individual
doesn’t reduce the amount available to others.
ii. Nonrivalry in consumption – one person can increase his satisfaction from the
commodity without reducing that obtained by others; i.e. the provision of
additional benefits of such good for consumption generates zero cost (the MC
created by additional consumer is nil).
NB: A good is said to be rival if the consumption of that good by a certain person affects the
consumption of the same good by any other person. Exclusion principle implies excluding
anyone consumer from partaking in the benefits, if he/she doesn’t pay.

iii. Nonexcludability – implies that it is impossible to exclude anyone consumer

from partaking in the benefits of public goods.
Examples of public goods include, Defense service, Clean Environment, Street
Light, Roads, etc.
Based on the above consumption characteristics, economic goods are divided as follows.
 A. Pure public goods: are goods which are indivisible and whose benefits can’t be priced,
and the principle of exclusion doesn’t apply. National Defense is the best example. These
goods have to be allocated by government.
B. Pure private goods: are completely divisible and the principle of exclusion applies to
them in full measure. That is, those who don’t pay are going to be excluded from
partaking in the consumption of these goods. Examples of these goods include clothes,
food, books, furniture, etc. For the allocation of these goods, a market-type solution,
without governmental intervention, is feasible.
C. Quasi-Public or Merit goods: these goods contain both divisible and indivisible benefits
and characterized by large group consumption. Educations and Health care services are
the best example. For the allocation of these goods, the participation of both the private
and public sectors is important. Even though the market system can provide these
services, government intervention is required because those who are not able to pay for
the services would be denied to get the services.
D. Club goods: is represented by the characteristics of both joint and equal consumption.
The degree of product indivisibility complete within the group. Exclusion of non-
members is possible. Swimming pools, Amusing parks, clubs, etc are examples of club
goods. These goods are not subject to allocation solution from government. Since the size
of the group is small enough to avoid the free riders' problem, market solution is feasible.
Given the properties of public goods, the benefits from social goods are not vested in the
property rights of a particular individual and hence the market can’t function. With benefits
available to all, consumers will not be voluntary to offer payments to the supplies of such goods,
especially where many consumers are involved – people will prefer to enjoy as free riders what
is provided by others. Therefore, the linkage between producers and consumers is broken and the
government must step in to provide (or allocate) such goods.

1.4: Justification for state intervention

Dear learner! As it was discussed in the previous part, in capitalist economy the main task of
providing goods and services is assigned to the private sector in which individual economic units
are motivated by economic rationality and guided by the market mechanism in their decision
making. In early days of capitalism it was widely believed that private sector was always more
efficient than the public sector. By implication almost all economic decisions were to be guided
by the “invisible hand” of market forces of demand and supply. The role of government was not
to interfere with the working of the market forces but to limit its own activities to the barest
minimum necessary.
The claim that the market mechanism leads to efficient resource use is based on the assumptions
(or conditions) of competitive factor and product markets, such as:
i. very large number of sellers and buyers in the market;
ii. standardized (or homogenous) products and inputs;
iii. economic agents (households and firms) are price takers;
iv. no obstacles to free entry into and exit from the market;
v. agents must have full market knowledge or perfect information; and
vi. free mobility of factors of production; etc.
However, a competitive market with such conditions is ideal and hence the concept of efficiency
is questionable. Therefore, though capitalist economy prefers for a free market economy, the
government must take steps to maintain economic stability, promote social justice, and provide
adequate public services which the private economy can’t properly and adequately provide.
In this section we want to answer the question: why there is a need for the state to intervene in an
economy?
The justification for state intervention includes the following:
A. In a free economy, market is ruled by demand and supply conditions. Thus, the
productive system was not geared to produce goods and services on the basis of
necessities, but on the basis of demand, implying an inherent inequality in the system.
Further, owners of scarce resources enjoyed higher income while those with plentiful
ones secure a lower income, which perpetuated income inequality in the system.
Therefore, government intervention is necessitated to promote equitable distribution of
income by means of taxes, expenditures and social security laws.
B. Private sector failed to produce and provide some public and quasi-public goods and
services like defense, roads, bridges, street lights, education, public health, etc which can
be made equally available to all and which cannot be sold on the profit making basis.
 Thus, the government must intervene in the market and makes an effort to fill up the gap
by producing such public goods.
C. Divergence between private and social costs and benefits, which arises due to many
factors, particularly externalities and interdependencies in production. For instance, in a
well working competitive market economy, prices reflect the relative values of different
goods to consumers as well as the marginal cost of producers. Prices serve as signaling
devise of benefits and costs. But in some situations a private decision maker may not
have to pay for all the costs he or she causes in the economy; in others he or she may not
able to reap all the benefits. Thus prices he/she will use in his/her decisions will not fully
measure the true value to the economy as a whole; consequently, prices will cease to
yield correct signals and hence private decisions based on this will not produce an
optimal result.
For example, a paper producing firm can pollute the water of neighboring river and thus
affect the health of the people who live around it. This is negative externalities (or
external cost) to the people. On the other hand, the private person plants a garden that
improves the hygienic condition of the locality for which he will not paid. Thus, a system
of taxes and subsidies can particularly correct this divergence by taxing those who get the
benefit (firms and people in the neighborhood of the garden, in this case) and subsidizing
those who incur losses (personal garden) for maintaining economic welfare under private
economy.
D. Capitalism may lead to natural monopoly due to large economies of scale. The supplies
of electricity, gas, telephone, mass transportation, etc are efficient if big organization
alone provides the services to the community as a whole. This monopoly leads to
economic imbalances because prices are higher (greater than marginal revenue) and the
output produced is less than the optimum. Thus, government regulation, even
nationalization of industries is necessary to ensure economically efficient output, but to
reduce economic inequality.
E. Very heavy risks, like enormous total research cost, long-period before costs can be
brought down to economical levels, heavy technological risks, etc cannot be provided by
the private sector. The best example is space program. Private sector may not pay for
space program partly because the cost may be very high or the benefit has very long
 gestation period. In this type of investment two forms of intervention have been
introduced:
 Direct government activity; and
 Government contracts to private industry.
F. There is no certainty that private economy will attain a desirable rate of growth. Hence,
government intervention is essential to stabilize income, prices and output so that socially
desirable level of growth and employment may attained.
1.5: Major Functions of the Public sector
Dear learner! In the above discussions, we hope that you have been convinced
on the need for the state to intervene in the economy. If that is the case, the
question that should come next will be what are the major functions of the state?
(You can use the space left below to write your response.)
____________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

The following are the major functions of the public sector:

A. The provision of social goods, or the process by which total resource use is divided
between private and social goods and by which the mix of social goods is chosen.
This provision may be termed as the allocation function of budget policy.
B. Adjustment of the distribution of income and wealth to ensure conformance with
what society considers as “fair” or “just” state of distribution is referred to as the
distribution function.
C. The use of budget policy as means of maintaining high employment, a reasonable
degree of price stability, and an appropriate rate of economic growth, with
allowances for effects on trade and on the balance of payments. We refer to all
these objectives as the stabilization function.
Note that while the policy objectives differ, any one tax or expenditure measure is likely to affect
more than one objectives. The problem, therefore, is how to design budget policy so that the
pursuit of one goal doesn’t void that of another.
 1.5.1: The Allocation Function:
Social or public goods as distinct from private goods can’t be provided through the market
system; that is, by transaction between individual consumers and producers. In some cases the
market fails entirely, while in others it can function only in an inefficient way. Thus the
provision of social goods or the process by which total resource use is divided between private
and social goods requires state allocation.

1.5.2: The Distribution Function:

The distribution function plays a key role in determining tax and transfer policies. But it is
difficult to handle. The distribution of income and wealth depends up on:
 the distribution of factor endowments, including personal earnings abilities
and the ownership of accumulated and inherited wealth.
 the price of factors, which in a competitive market sets factor returns equal to
the value of marginal product.
The answer to the question of fair distribution involves considerations of social philosophy
and value judgments. Philosophers argued that persons have the right to the fruits derived
from their particular endowments that distribution should be arranged so as to maximize total
happiness or satisfaction, and that distribution should meet certain standards of equity,
which, in a limiting case, may be egalitarian.
There are two major problems involved in the translation of justice rule into an actual state of
income distribution.
A. It is difficult to compare the levels of utility which various individuals derive from
their income.
B. The size of the pie which is available for distribution is not unrelated to how it is to be
distributed.
Withstanding these difficulties, distributional consideration remains an important issue of public
policy. Among various fiscal devices, redistribution is implemented most directly by:
 a tax transfer scheme, combining progressive taxation of high income with
subsidy to low income households;
  Progressive taxes used to finance public services like housing, public transport,
public health care services, etc. which partly benefits low income households; and

 a combination of taxes on goods purchased largely by high income consumers

with subsidies to other goods which are used chiefly by low income consumers.
1.5.3: The stabilization Function:
 The stabilization policy relates to the budget policy on the macroeconomic performance
of the economy. Without this policy the economy is subjected to substantial fluctuations
and may suffer from unemployment and inflation. With growing international
interdependence, forces of instability may be transmitted from one country to another,
which further complicated the problem.
 The overall level of employment and prices in the economy depends upon the level of
aggregate demand relative to potential or capacity output valued at prevailing prices. The
level of demand is the function of the spending decisions of all economic units in the
system. These decisions, in turn, depend upon past and present income, wealth position,
credit availability, expectations, etc.
 Sometimes the level of expenditure may be insufficient to secure full-employment of
labor and other resources. This is because wages and prices are usually downward rigid.
Thus, expansionary measures to raise aggregate demand are then needed. At another
times, expenditures may exceed the available output under conditions of high employment
and hence may cause inflation. In such cases restrictive measures are needed to reduce
demand.
 Policy instruments available to deal with these problems involve both monetary and fiscal
measures, and their interaction is of great importance.
 Who do you think is responsible for controlling the money supply?
 Money doesn’t control itself. But monetary authority (Central Banking) control money
supply. Monetary policy such as the devices of reserve requirements, discount rates, and
open market operations, are thus an indispensable component of stabilization policy.
Expanding the money supply will tend to increase liquidity, reduce interest rates, and
thereby increase the level of demand. With monetary restriction working in an opposite
direction.
 Raising public expenditures will be expansionary as demand is increased, initially in the
public sector, and then transmitted to the private market. Tax reduction may be
expansionary as tax payers are left with a higher level of disposable incomes and may be
expected to spend more. To reduce aggregate demand during inflationary condition the
government uses tight (or restrictive) fiscal policy of reduction in public expenditure
and/or rise in taxes, which will withdraw money from the public.
 In a state of depression there is a need for fiscal policy that enables to inject (generate)
funds into the national economy. This could be achieved by using expansionary fiscal
policy of rise in government expenditure and a decline in taxation.
1.5: Constraints of the Public Sector
Dear learner! In the previous sub-sections we have discussed the limitation of the market
system and the need for government to intervene and correct these limitations. However, do
you think the public sector is without any limitation? Can you list the major constraints of the
public sector?
I hope you will consider that the public sector is also subject to different limitations. That is,
the state may not be able to provide all those goods which have predominantly public
elements in them. The following are some of the constraints of the public sector.
i. The state may not have enough resources, particularly in Least Developed Countries, to
undertake the supply of those goods;
ii. The administrative machinery of the state may not be efficient enough to undertake the
provision of all the goods which are predominantly public in nature. This problem is more
sever in Least Developed Countries, because of lack of skilled manpower, problem of
adequate statistical information, corruption, etc;
iv. The efficiency in public undertaking is very low. There is lack of initiative and a
proper system of incentives; and
v. The level of government activities depends upon political and social acceptability of
its policies.