What is Public Finance discuss the scope or subject matter of public finance?

This article covers the following:

1. Introduction (Scope and subject matter of Public Finance).

2. Public finance is a positive science or a normative science.

3.Private Finance and Public Finance.

4. Merit goods and mixed goods.

1. Introduction:

Public finance is the study of the role of the government in the economy. It is the branch of economics that the government revenue and government expenditure of the public authorities.

Prof. Dalton classifies the scope of public finance into four areas which are follows-

(i) Public income or public revenue: Public income or public revenue refers to the income of the government. The government earns income in two way -Tax and non tax income. Tax income include-Income tax, sales tax, duties etc. Non tax income include- rent and income from government properties, donation etc.

(ii) Public expenditure: Public expenditure is the money spent by the government entities. The government is spent money on infrastructure, education etc. for growth and welfare of the country.

(iii) Public debt: When public expenditure is more than public income, the gap is filled by borrowing money from public or from other countries or world organization such as The world bank, IMF (International Monetary Fund) etc. Thus borrowed funds are public debt.

(iv) Financial Administration: As the name suggest this area of the public finance is all about the administration of all public finance that is public income, public expenditure and public debt. Financial administration includes proportion passing and implementation of government budget and varies government policies.

As the economic and social responsibilities of the state increasing day by day, the methods and technique of rising public income, public expenditure and public borrowing are also changing

2. Public finance is a positive science or a normative science: 

Public finance is an important branch of economic analysis. In this branch we study the functions of the state. The public finance is also called public economy. The primary objective of this economics is to study the economic functions of the govt. of a country.

Public Finance As a Normative Science: Under normative science the public finance studies the activities of the govt. and the economic policies that make for an efficient conduct of public budget. Under this approach, a theory is developed to explain the economic policies of the govt. and it's impact on the society. Commonly it is termed as Fiscal Policy. It means that the primary aim of the govt is to influence the aggregate economy through its fiscal policy. The normative approach contains.

(i) Allocation Budget: The purpose of allocation budget is to determine how to allocate the tax burden and how to allocate public expenditure to satisfy public wants. Generally the govt. prepares expenditure programmes on the basis of tax revenue collection.

(ii) Distribution Budget: The objective of the distribution budget is to use tax expenditure to bring about proper distribution of income and wealth in the society. Several factors determine distribution of income and wealth in a market economy. The primary objective of the public finance is to stablish equal distributed society which ensures growth with justice.

(iii) Stabilization Budget: Economic instability in the form of inflation or deflation disturbs the smooth growth process of the country. Therefore another important objective of stabilization budget is to stablish the economic fluctuations such objective ensures growth with full employment.

Public Finance As a Positive Science: The public finance is also considered as a positive science. It studies different mechanism of economic laws. Public finance formulates different economic polices on the basis of such laws. Under positive science public finance studies-

(i) Tax Mechanism: The public economy studies how the tax device can be formulated. It explains different laws of taxation, their types and impacts.

(ii) Public Expenditure: Public economy is closely associated with public expenditure. The public authority formulate expenditure plan on the basis certain laws and theories. The aim of the public expenditure is to maximize public welfare of the society.

(iii) Public Borrowing: Public borrowing is an important device of the modern public finance. It plays a significant role in the developing countries where the source of finance is very limited. The public authority collects necessary funds through the public borrowing. For this reason the govt. formulates different policy measures.

(iv) Public Budget: Modern govt. is a welfare govt. The aim of the govt is to fulfill growing public needs. The govt. fulfills the public wants through the public budget. It is an important device through which the govt. uses the limited resources in an optimum manner.

(v) Fiscal Policy: Another most important content of the public economics is fiscal policy. The govt. prepares fiscal policy to achieve certain predetermined goes. Such as economic stability and full employment.

Thus from the above analysis it is cleared that the public finance is both a normative science as well as a positive science.

3. Different between Private Finance and Public Finance:

(i) Private finance is related to a particular house hold or a person. But public finance is related to a country.

(ii) In case of private finance income determines the expenditure pattern of the house hold. But in case of public expenditure pattern determines the income of the society.

(iii) The aim of the private finance finance is to maximize self interest, but the aim of the public finance is to satisfy public interest.

(iv) Secrecy is maintained in case case of private income and expenditure, but no secrecy is maintained 

in case of public finance rather govt. announces the expenditure and income programmes.

(v) The house hold provides more importance both on the present and future, but the public finance gives more importance on the present.

 4. Distinguish between merit goods and mixed goods:

Merit goods are those goods which society things that everyone should have, like basic education, health care, etc. Merits goods provide benefits to the society as a whole for example- Education is a merit goods which benefits entire society.

On the other hand, mixed goods are those goods which can be supplied both from the public and private sectors. The main differences between mixed goods and merit goods are given bellow-

(i) Mixed goods are the result of the combination of public and private sectors, where as merit goods are provided by the public sector only.

(ii) Profit motive is related to the mixed goods. But public welfare is related to the merit goods.

(iii) The scope of mixed goods is very limited while the scope of the merit goods is very wide.

(iv) The concept of merit goods is very limited while the mixed goods include the conception of merit goods.

(v) The scope of merit goods is very important in an under developed society then the mixed good.