Meaning,scope and importance of Public Finance

Public Finance means study of income and expenditure of Central state and local governments and the principles underlying them. However economists have defined it in a narrow and wide sense.

scope of public finance
According to Bastable,"Public Finance deal with expenditure and income of public authorities of the states and their mutual relation and also with the financial Administration and Control." Harold groves define public finance as "a field of inquiry that treats of the income and expenditure of government. In Modern Times this includes four major divisions: public revenue, public expenditure, public debt and certain problems of the fiscal system as a whole such a fiscal Administration and fiscal policy."

public finance

Thus Public Finance studies the income and expenditure of Central, state and local governments for the collective satisfaction of wants and the principles which govern income and expenditure. Here we discuss nature, meaning and scope of public finance.

Nature of public finance

Public finance is a social science which is concerned with the problems of rising of funds and allocation for the collective satisfaction of wants. Its methods of study are based both on the study of the principles and theories or laws of public finance and on a descriptive and statistical study of the actual operations of government finances.

Its principles are in the nature of generalizations which states the cause and effect relationship of different variables like public revenue, expenditure, debt and financial administration.These also form the subject matter of public finance.

Public finance is also an art. It concerned with fiscal policies which influence economic policies and economic structure of the country. All government aim at bringing Social Justice through and equitable financial system.

Scope of Public Finance

Prof. Delton divides the scope of public finance into four categories: public income, public expenditure, public debt, and financial administration.In this scope of public finance is the very important part. So we discuss them as under:-

Public income:-

Public income is called public revenue.The main source of public revenue are Texas, fees, fines, special assessment and commercial revenues from
public undertakings. In public income, we study the canons and principles of taxation, the various direct and indirect taxes and their impact and incidence, the effects of taxation, the problems of tax evasion and avoidance and the measures to solve this problem so as to raise public revenues.

Public expenditure:-

Public expenditure is the beginning and end of the collection of revenue by the government. As point out by the Plehn," Public expenditure is the end and aim of collection of revenues and of other financial activities of the statesman."

Public Debt:-

when public revenue falls short of public expenditure, the government borrows from the public to meet the gap. This is called debt.

Financial administration:-

The aim of financial administration is to control processes and operations of public revenue, public expenditure and public debt.

What is the importance of public finance? 

Public Finance plays an important role in the economy of a country whether it is dependent or depending in the following ways:-

In a developed countries:-

The importance of public finance in an advanced country is to stabilize its growth rate.For this ,the government changes its expenditure and taxation policies to produce good effects and avoid bad effects on national income, production, employment and price. when the prices are falling in a recession, private investment falls. To compensate for the lack in investment and to raise effective demand, output, employment and income the government increases expenditure on public works and social securities programmers through budget deficits, debt repayment and reduction in taxes.

In a developing countries:-

Public Finance plays a dynamic role in a developing countries. It is indispensable for its economic development.According to Prof. Nurkse,"Public Finance assumes a new significance in the face of the problem of capital formation in underdeveloped countries." The per capita income and savings are extremely low in such countries. The few rich waste large portions of their savings in property, jewelry, gold speculation etc and in conspicuous Consumption. Fiscal policy diverts them into productive channels through taxation, borrowing and expenditure. Fiscal policy promotes economic development by increasing the rate of investment, encouraging investment in social and economic infrastructure, increasing employment opportunities, reducing balance of payment disequilibrium, counteracting inflation, reducing inequalities of income and wealth and increasing national income.

What is the difference between public and private finance?

Public finance is the study of income, expenditure, borrowing and financial administration of the government.On the other hand private finance is a study of income, expenditure, borrowing and Finance administration of individual or private companies. There are, therefore no fundamental differences between public finance and private finance. However there are certain basic differences between the two we examined the low both the views..



Both public and private finance at the satisfaction of human wants. The objective of public finance to satisfy social wants and that of private finance to satisfy individual wants.


Both Government and individual follows similar principles. The government follow the principle of maximum social benefit while spending its income. Similarly, an individual follow the principle of maximum satisfaction when spending out of his given income.

Income expenditure and borrowing 

Both Government and individual have similar but limited sources of income. Both earn their incomes.


Both Government and private companies follow sound and unsound financial policies. If the government follow sound financial policies, it maximize social welfare. Similarly, an individual maximizes his welfare.The opposite happens in the case of unsound financial policies.


Both Government and private companies require efficient administration for their success.


Adjustment between income and expenditure 

An individual determines his expenditure on the basis of his income. He prepare his family budget on expected income during the month. On the other hand the, government first estimate about its expenditure and then find out means of raise the necessary income.


There is great elasticity in public finance than in private finance. The government has more resources of income where is the resources of an individual are limited.


There are also different in motives between private and public finance. An individual or a firm has a profit motive whereas the government has the Welfare motive.


There are differences in the nature of Expenditure between the two. An individual's expenditure is governed by his habit, customs, fashions etc. On the other hand the government expenditure depend on its economic and social policies like removing unemployment and poverty, reducing income inequalities, providing infrastructure facilities etc.


There is compulsion in public finance. People have to pay taxes. If they do not pay, they are punished by the fine and imprisonment. But an individual or firm cannot force any body to pay him money. He can file a suit in the court. But even then he may not receive his money bank. The same in the case with loans.

Law of equi marginal utility 

An individual spend his Limited income on various goods and services in such a manner that the MUs  of these expenditure are equal. The government also tries to maximize social welfare based on the law of equi marginal utility. But often the government cannot follow this this principle because a large volume of government expenditure is a fixed nature which cannot be changed to equalize marginal utility.

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