Fundamental of Economics

Public Finance deals with the question how the government raises its resources to meet its ever-rising expenditure. According to Dalton , “Public finance is concerned with the income and expenditure of public authorities and with the adjustment of one to the other.” Major Function of Public Finance: · Allocative Function: Allocative function deals with the question what are the sources of government revenue, i.e. how much amount government will earn from each earning source. · Distributive Function: Distributive function deals with the question what are the categories of government expenditure, i.e. how much amount government will spend for each common benefit for the people of the country. · Stabilization Function: Stabilization function deals with the fiscal policies which ought to be adopted to achieve certain objectives such as price stability, economic growth, more equal distribution of income. Importance of Public Finance or Reas

Public expenditure refers to the expenditure which a government incurs for 1. Its own maintenance 2. The society and the economy 3. Helping other countries. Classification of Public Expenditure: · Productive and Unproductive expenditure: Productive expenditure promotes the production of country and national income. For example, expenditure on agriculture, industry, education, transport etc. Unproductive expenditure does not promote the production of country and national income. For example, expenditure on protection against aggression from external and natural disasters etc. · Central, Provincial and Local expenditure: Expenditure by central Government is treated as central expenditure; expenditure by provisional Government is treated as provincial expenditure and expenditure by local Government is treated as local expenditure, i.e., union parishad, pauroshava etc. · Maintenance and Development expenditure: Money spent on the maintenance of internal

Public debt refers to borrowing by a Government from within the country or from abroad, from private individuals or association of individuals or from banking and non-banking financial institutions. Classification of Public Debt: · Internal and External debt: Internal debt is raised from within the country and external debt is owed to foreigners or foreign governments or institutions. · Productive and Unproductive debt: The productive debt is expected to create assets which will yield income sufficient to pay the principle and interest on the loan. In other words, they are expected to pay their way; they are self-liquidating. On the other hand, loans raise for war or protection against natural disaster do not create any asset; they are dead weight and are regarded as unproductive. · Short-term and Long-term debt: Short-term loans are repayable after short interval of time, e.g. treasury bills payable after three months, ways and means advances from the

Public Revenue and its Sources: Public revenue deals with the question what are the sources of government revenue, i.e. how much amount government will earn from each earning source. Main sources of public revenue are fee, commercial income, fine and compensation, income from government resources, issue of note, interest, public debts, no heir of any wealth and gift by any person, miscellaneous sources etc. Tax: A tax is a compulsory payment levied on the persons or companies to meet the expenditure incurred on conferring common benefits upon the people of a country. Two aspects of taxes follow from this definition: · A tax is a compulsory payment and no one can refuse to pay it. · Proceeds from taxes are used for common benefits or general ourposes of the state. Features of Tax: · Tax is non-penal. · It is not fee. Fee is given for getting specific direct benefits. · It is paid without any expectation of direct ben