Understanding the Concept of Public Finance

Public finance is a branch of economics that evaluates government revenues and expenditures of public authorities. It is an avenue enables us to know the roles that government should play in an economy.

Adam Smith, a well known economist defines public finance as an investment into the nature and principles of public (state) revenue and expenditure.

Public finance is purview to be of three folds of government roles which includes:

1. Allocating resources efficiently
2. Income distribution
3. Macroeconomic stabilization

Public finance embraces the use of fiscal policies. Fiscal policy is the use of government revenues (especially taxes) and government spending (expenditures) to control the economy. It uses interest rate and money supply to influence the economy. Fiscal policy is usually embedded in the budget and it is meant to create a healthy economic growth in a country.

Functions and objectives of public finance

Public finanne plays various roles in an economy. Below are some of the major roles:

1. Stabilization of prizes.

One of the roles of public finance is to stabilize the prizes of goods and services in a country. It helps to regulate the various fluctuations that may destabilize the economy as a result of inflation or deflation.

2. Resource allocation

Public finance enables the efficient and effective distribution of resources among the public and private sectors. It helps to make sure that resources are well allocated among all sectors in an economy.

3. Equitable distribution of wealth

Public finance helps to distribute wealth equitably among individuals of all sections of the economy. It creates room for the enabling of equal distribution of wealth in the economy.

4. Provision of full employment

Public finance als aims at providing full employment in an economy. It helps to reduce the rate of unemployment by creating various employment opportunities.

5. Favourable balance of payment.

Public finance helps to maintain favourable balance of payment in an economy. They do this by using the fiscal policy to regulate the economy.