Economic Activities and the State

Public Finance


Textbook, 2013

100 Pages


Excerpt

Content

UNIT 1
ECONOMIC ACTIVITIES AND THE STATE
1.1 INTRODUCTION
1.2 PUBLIC GOODS (SOCIAL GOODS) VS PRIVATE GOODS
1.3 THE SCOPE OF GOVERNMENT ACTIVITY

UNIT 2
PUBLIC REVENUE
2.1 AIM OF THIS CHAPTER
2.2 DEFINITION OF A TAX
2.3 THE BASE OF A TAX
2.4 BUOYANCY AND ELASTICITY OF A TAX
2.5 PRINCIPLES OF TAXATION
2.6 CHARACTERISTICS OF A GOOD TAX SYSTEM
2.7 OBJECTIVES OF TAXATION
2.8 TAXABLE CAPACITY
2.9 THE INCIDENCES OF TAX

UNIT 3.0
PUBLIC DEBT
3.1 MEANING OF PUBLIC DEBT
3.2 The unique characteristics of public debts as opposed to private debts
3.3 TYPES OF PUBLIC DEBT
3.4 NEED FOR PUBLIC DEBT
3.5 EFFECTS OF PUBLIC DEBT
3.7 Management of public debt
3.8 Redemption of public debt
3.9 The role of public debt in economic development
3.10 Conclusion

UNIT 4
PUBLIC EXPENDITURE
4.1 Meaning
4.2 THEORIES OF PUBLIC EXPENDITURE
4.3 OTHERS FACTORS WHICH CONTRIBUTE TO THE TENDENCY OF INCREASING PUBLIC EXPENDITURE IN A MODERN SOCIETY
4.4 KINDS OF PUBLIC EXPENDITURE
4.6 CANONS OF EXPENDITURE
4.7 The effects of public expenditure

UNIT 5
THE PUBLIC BUDGET
5.1 Introduction
5.2 CHARACTERISTICS OF A GOOD BUDGET
5.3 CHALLENGES TO GOVERNMENT BUDGET
5.4 ECONOMIC AND FUNCTIONAL CLASSIFICATION OF BUDGET
5.5 CONCLUSION

UNIT 6
ECONOMIC PLANNING
6.1 ECONOMIC PLANNING
6.2 Requisite for Successful Planning
6.3 Types Of Planning Models
6.4. Important Considerations In Choosing Planning Models

UNIT 7
FISCAL POLICY AND MONETARY POLICY
7.1 objectives of fiscal policy
7.2. fiscal policy for economic growth
7.3. Compensatory fiscal policy
7.4. Conclusion
7.5. Monetary policy

UNIT 8
PUBLIC UNDERTAKINGS / PUBLIC ENTERPRISES
8.1 there are two reasons for looking at public enterprise as part of the public sector management
8.2 Kinds Of Public Enterprise
8.3 Hand transport and postal

MODULE

UNIT 1 ECONOMIC ACTIVITIES AND THE STATE

1.1 INTRODUCTION

The basic nature of any economy lies in the scarcity of its productive resources in relation to its want. Our wants are ever increasing and recurring while availability of resources for satisfying them lags behind.

An economy is constantly engaged in the solution of this eternal problem of scarcity. It therefore, undertakes various activities where by the available supply of resources is augmented, existing supplies are utilized more effectively, and some additional objectives like stability, growth, and distribution etc are met with as fully as possible.

The division of economic activities between public and private sectors of the economy should not be a haphazard one, but should be based upon relevant economic and socio-political objectives and within the constraints of the country’s institutional framework.

Accordingly, in a 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. The owners of factors of production are guided by the income which they earn in alternative employments, the investors are guided by the profitability of alternative investments; the consumers try to maximize their consumer surplus and so on. In a pure market economy, virtually all goods and services are supplied by the private firms for profit and all exchanges of goods and services takes place through markets, with prices determined by free interplay of supply and demand. Individuals would be able to purchase goods and services freely, according to their tastes and economic capacity( their income and wealth), given market determined prices.

A socialist economy, on the other hands, is dominated by the state sector, here, economic activities and decisions of the state are expected to be guided not by commercial profitability but by the totality of objectives of society. Market mechanism is assigned, if at all, a very marginal role.

Where both private and public sectors are assigned significant roles

Some thinkers justify a fairly large pressure of the state sector in an economy on grounds of failures of an unregulated market mechanism. To them, the state has numerous beneficiary roles to play including al locative, distributive, regulatory and stability ones. They argue that the patterns of resource allocation, production, demand and consumption do not result in conformity with true needs and aspirations of the society, there are large scale inequalities of income and wealth.

Keynes argued that such an economy is always facing a problem of deficiency of effective demand and therefore, unemployment. Some thinkers want the state to actively contribute to the process of economic growth and reduction in inequalities.

Musgrave and Musgrave point out two additional reasons for growing state role in an economy namely;

i) As per capita income increase, people want more of goods or services supplied by both the state and the private sectors.
ii) There is complementarity between the state and private sectors over a wide range of activities, particularly in the spheres of infrastructural facilities and merit goods.

Study of the state and economy is related therefore, to the activities of the public sector including government organs and commercial undertakings. However, for grasping the rapture of state and economy and the problems and principles that go with it, it is very helpful to distinguish between the public and private goods.

In a mixed economy, provision of a significant amount of goods and services takes place through political institutions. This involves interaction among all individuals of the community, rather than just buyers and sellers as is the case when goods and services are provided by the markets. In a market, buyers are not compelled to purchase something they do not want. Political decisions, however, compel citizens to finance government services and programs regardless of their personal preferences.

In a mixed economy, government participates in markets as buyers of goods and services. Government purchases inputs from households and acquire ownership rights of such productive resources as land and capital. Government uses these inputs to provide goods and services that are not sold to households and business firms but are made available through non market rationing. However, governments do sometimes own and operate enterprises such as the postal services, rail roads, liquor stores, and state lotteries.

Governments also purchase outputs of business firms such as paper, cars, bricks and guns. To pay them, government requires businesses and households to make various payments such as taxes, charges and fees and might even require resources be made available for use by government at rates of compensation below actual market prices( as is the case with compulsory military service). Governments use these productive resources they acquire to produce goods and services including national defense, roads, schooling, police, fire protection, and many other essential services.

INDIVIDUALS, SOCIETY, AND GOVERNMENT

Governments are organizations formed to exercise authority over the actions of people who live together in a society and to provide and finance essential services. Many citizens and resources are employed in the production of government services. Individuals pay taxes and in many cases, are recipients of income financed by those taxes. For example, social security pensions, unemployment insurance compensation, and subsidies to the poor are financed by taxes.

The extent to which individuals have the right to participate in decisions that determine what governments do varies from society to society. What governments do, how they spend, and how they obtain means to finance their functions reflect political interaction of citizens. Political institutions constitute the rules and generally accepted procedures that evolve in a community for determining what government does, and how government outlays are financed. Through these mechanisms, individual desires are translated into binding decisions concerning the extent and functions of governments.

Therefore, such democratic institutions as majority rule and representative government offer citizens an opportunity to express their desires through voting and through attempts to influence the voting of others. Under majority rule, one alternative such as a political candidate or referendum to increase funding for education is chosen over others if it receives more than half of the votes cast in an election. Just as economic theory is applied in the analysis of markets interaction and individual choice, so can it be applied to political interaction and choices. Modern economics bases the study of government activity on a theory of individual behavior.

ALLOCATION OF RESOURCES BETWEEN GOVERNMENT AND PRIVATE USE

Government provision of goods and services requires labor, equipment, buildings and land. The real costs of government goods and services are the value of private goods and services that must be sacrificed when resources are transferred to government use. When citizens pay taxes, their capacity to purchase goods and services for their own exclusive use is reduced. Resources that are thereby diverted from private use are purchased or otherwise obtained by government. Taxes also have indirect costs because they distort choices. Taxes affect prices of goods and services and the incentive to work, save, and allocate expenditures among goods and services. Taxes impair the operation of the economy by inducing to make choices based not only on the benefits and costs of their actions but also on the tax advantages and disadvantages of their decisions. The distortion in resource use and loss in output that results from the effects of taxes on incentives is also part of the costs of government activity.

The resources government obtains are used to provide citizens with goods and services such as roads, national defense, etc. these goods and services are shared by all; they cannot be used by any one person exclusively. Other goods and services provided by government are limited in availability to certain groups, such as the aged or children, as with security pensions and public schooling.

The trade off between government and private goods and is best explained with the concept of production- possibility curve which gives the alternative combinations of government goods and services that can be produced in an economy, given its productive resources and technology and assuming that resources are fully employed. Private goods and services are those items that are usually made available for sale in markets. Government goods and services are usually not sold in markets.

Hence, an increase in the amount of goods and services provided per year for instance, requires a reduction in the amount of private goods available per year. For example, suppose that individuals demand more environmental protection services. To make these services available, government enact more stringent regulations that prevents pollution. The new regulations or taxes are likely to increase costs of production for business firms, causing the prices of products produced by these firms to increase and the quantities demanded in the marketplace by consumers to decline. The new policies will result in improved environmental quality; a government supplied good, but will also require that households sacrifice consumption of private goods and services to pay for the cleaner environment.

HOW GOVERNMENT GOODS AND SERVICES ARE DISTRIBUTED

Goods and services are, by and large, distributed to groups of individuals through the use of ‘’nonmarket rationing’’. This means that government goods and services are not made available to persons according to their willingness to pay and their use is not rationed by prices. In some cases the services are available to all, with no direct charge and no eligibility requirements. The provision of national defense is one strong example of a good that is freely available to all and not rationed by prices.

In some cases, the services are subject to certain criteria such as income, age, familty status, residence or the payment of certain taxes, fees, or charges are used to determine eligibility to receive benefits. For example, to receive social pensions in the USA, individuals should have worked for a certain period of time and must have paid their share of social security taxes during that time.

Similarly, a fare must be paid to use public transportation facilities in cities. If the fares paid do not cover the full cost of operating the system, the deficit is made by taxes levied by government.

Hence, in public finance, we study how the means of rationing the use of government goods and services and financing their resource cost affect incentives, resource use, and production possibilities. Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures. It is crucial because it gives clues in the analysis of the impact of government expenditures, regulations, taxes, and borrowing on incentives to work, invest, and spend income.

Government expenditures can be divided into two categories; government purchases and government transfer payments. Government purchases are those that require productive resources( land, capital and labor) to be diverted from private use by individuals and corporations so that resources can be used by the government. Example, to supply national defense services, the government must acquire steel, labor and other inputs necessary to support the armed forces and maintain air crafts, tanks and ships and other equipments.

Government transfer payments constitute a source of income support to receipients who are not required to provide any service in return for the income received. Included in the transfer payments are social security pension benefits, unemployment insurance benefit payments, and cash payment to low income families.

1.2 PUBLIC GOODS (SOCIAL GOODS) VS PRIVATE GOODS

Goods with benefits that cannot be withheld from those who do not pay and are shared by large groups of consumers are called’’ public goods’’. Public goods are usually made available politically through the ballot boxes as people vote to decide much to supply rather than through the market place, where those who care to pay the price can buy as much as they like for their own exclusive use. In most cases, government provision of goods, public in nature implies that the goods are freely available to all rather than being sold in the markets. The costs of making the goods available are usually financed by taxes.

A pure private good is non rival in consumption for an entire population of consumers and its benefits have the characteristics of non exclusion. A given quantity of pure public good is consumed by all members of a community as soon as it is produced for, or by, any one member.

The marginal costs of distributing a pure public good to an additional consumer are zero for a given amount of the public good. This follows from the non rival characteristics of pure public goods and the results in external benefits to all people, even if made available by one person.

Hence, the differences in private and public goods are guided by the concepts below;

- The product divisibility. These are certain goods the availability of which to users can be decided in a discriminatory manner. Such goods may be subjected to principle of exclusion by making it a priced product. Those who cannot or do not agree to pay its market price are debarred from its use. In this sense, it becomes divisible so far as its use is concerned. Thus, the ability to price a good, its divisibility and the exclusion principle, all go together. Its indivisibility characteristics may also imply that each individual has an access to its entire amount to that his use of it does not reduce its availability to other. For example, any number of persons can turn in a radio or to programme without depriving others of the facility.

Alternatively, it may be that if some persons are allowed access to its use, other members of the society cannot be prevented from its use. For example the defense service. Once the country is proceeding against foreign aggression, no section of the society can be excluded from enjoying its benefits. The defense service in other words is indivisible. It cannot be priced in the market in order to deprive some members of the society from its benefits. Similarly, in some cases a consumer cannot surrender the use of a service even if he wants to. An individual cannot ask to be left undefined by the defence arrangements of the state, or refuse the benefit of a reduction in air pollution or that of street lighting etc.

The question of financing the supply of a specific good or service is closely linked with its being a social good or a private good. A private good is subject to the principle of exclusion. It can be priced and those who do not pay for can be deprived of it.

In contrast a public good is indivisible and the principle of exclusion does not apply to it case quaintly there is a risk of beneficiaries not paying for it voluntarily. For example, in the case of defence service, being few or even more may pay for it voluntarily hoping that through the contributions and efforts of others the supply of the service will be maintained. This is referred to as the problem of free riders that is the problem of financing the supply of a good on a voluntary basis. Therefore, the provision of such a good or service has to be financed through compulsory contributions like taxation by the members of the society. Their financing cannot be left to the market mechanism.

The indivisible goods whose benefits cannot be priced, and therefore, to which the principle of exclusion does not apply, are called pure public goods. Pure private goods on the other hand, are completely divisible and to them the principle of exclusion applies in full measure. Only those who can get there goods are the ones who are both willing and able to pay their market prices.

It must, however, be noted that the indivisibility of a good does not necessarily imply that ever citizen of the society has actually an equal share in its benefits. In case of a war, protection against enemy attack may, to some extent, depend upon ones places of residence and work. Similarly, people living rear political boundaries of the can try May, for obvious reason, be relatively less procted.

Thus, the main criterion of indivisibility is that the good in question should be equally available to all members of the society or a section there of irrespective of their ability or willingness to pay for it. The financing of the concerned activities has to through public expenditure and not through market pricing. This implies that pure goods must be in the hands of the public sector only.

In order to decide as to which sector public or private should provide pure private goods, we have to consider the following additional factors.

i) political and social objectives of the society
ii) the level of efficiency at which the public and private sectors may be expected to operate
iii) additional characteristics of pure and private goods.

2) Externalities

Pure goods are characterized by the existence of externalities, that is, the economic affects which flow from their production or use to other parties or economic units. Such economic effects may also be called shrill over effects, neighborhood effect or third party effects. They arise on account of interdependence of economic units via inputs or output relationships and may be in the form of gains or losses. It may be pecuniary, that is, directly monetary or technological.

An externality affects the prices in the economy which in turn transmit their effects to production and consumption decisions of other economic units. This causes a divergence between the internal or private and social marginal costs or benefits of the good in question. For example, pollution caused by factories, power houses, railways etc. is a cost to the society but not to the individual undertakings similarly, beneficial externalities of social over heads like roads etc case a divergence between private and social marginal benefits.

These externalities are of two types

i) Market external effects and

ii) Non-market external effects. In the case of non-market external effects individual economic units cannot be identified are charged for economic gains. In contrast, in the case of market external effects, the losers (beneficiaries) can be identified and compensated (charged) for the same;

By implication, therefore, provision of public goods with non-market external effects should be preferably in the hands of public authorities since they can do so in respective of their commercial profitability. In contrast, pure public goods with external effects may be left in the hands of the private sector.

A pure private good, in summary is supposed not to have any externalities. In this case, there is no difference between private and social marginal costs of supply. And therefore, its market price represents its social supply costs also. By implication, even in the hands of private sector, its supply would be at the socially optimum level. Ordinarily, therefore, the provision of pure private goods should be entrusted to the private sector. But on account of various reasons this may not be adhered to in every case. The government may decide to step in where merit goods are concerned or for other relevant considerations like the cost conditions, resources availability, social and political philosophy and so on.

iii) Marginal costs.

A likely characteristic of a pure good is that its marginal cost is zero or close to zero. It means that an additional member of the society can benefit by its use without appreciably adding to its total costs. In other words, the use of a pure public good by one more member of the society does not reduce its availability to others example is a bridge, over which an additional vehicle may pass without any additional cost to the society.

However, the provision of a public good may be increased or decreased for budgetary reasons or due to extraneous ts. Pure public goods which process these characteristics have a strong case fro inclusion in the public sector since public goods are indivisible also.

In the case of private goods, on the other hand, the argument is basically in favor of large scale production for which either the society should agree to monopolistic type of private enterprises or should go in for public sector.

iv) Decreasing cost

This is another characteristic of a pure public good. Being Lumpy, it would be subject to the economiies of scale. If the public good is provided in small units, then the average cost is likely to be much more. Example, the average cost of operating a sewerage system is much smaller if it serves a wide area than when it serves only a portion of the society.

v) Impure public goods

It would be noticed that it is highly difficult to come across goods which fully satisfy all the characteristics of pure public goods. Similarly, it is highly difficult to come across pure private goods. In general, most goods possess elements of both publicness and privateness. The difference between goods is mostly of degree and not of kind. Such goods which are neither pure public goods nor pure private goods are called impure public goods also called quasic public goods or quasi private goods.

If the elements of publicness are predominant in the mixture of characteristics of a good, there may be termed a public goods and in the opposite case, a private good.

There are basically two categories of externalities: negative and positive externalities. Negative externalities, also called external costs, are costs to third parties other than the buyers or the sellers of an item not reflected in the market price. An example is the damage done by industrial pollution to people and their property. The harmful impacts of pollution are impairments to good health and reductions in the value of business and personal property and resources. Those bearing pollution damages are third parties to market exchanges between buyers and the sellers of goods and services. Their interests are not considered by the buyers and sellers when an externality is present.

Positive externalities are benefits to third parties other than the buyers or the sellers of a good or service not reflected in prices. Buyers and sellers of goods, that, when sold, results in positive externalities do not consider the fact that each unit produced provides benefits to others. For example, a positive externality is likely to exist for fire prevention, because the purchase of smoke alarms and fire proofing materials benefit those other than buyers and sellers by reducing the risk of the spread of fire.

Why do externalities pose problems for resource allocation in unregulated markets?

Unregulated markets result in prices that equal the marginal costs and marginal benefits that seller incurs and buyers enjoy. When an externality exists, the marginal costs or benefits that the market participants base their decisions diverge from the actual marginal social costs or benefits. For example, with a negative externality, business firms producing a product for sale in the market place neither pays for nor consider the damage the production or consumption of that product can do to the environment. Similarly, with a positive externality, buyers and sellers of a product in the market place do not consider the fact that their production or consumption of the item benefits third parties.

Internalization of externalities

Internalization of an externality occurs when the marginal private benefit or cost of goods or services are adjusted so that the users consider the actual marginal social benefit or costs of their decisions. In the case of negative externality, the marginal cost is added to the marginal private cost for internalization, while for a positive one, the marginal external benefit is added to marginal private benefit to internalize the externality. Internalization results in changes in prices to reflect marginal social costs or benefit of a good.

Internalization of externalities requires identification of the individuals involved and measurement of the monetary value of the marginal external benefit or costs. Economic policy towards externalities is sometimes controversial because of strong differences of opinion concerning the actual value of the external costs or benefit. For example, how can all the sources of air pollution identified? How are damages done to property and personal wellbeing evaluated? This is a formidable scientific, engineering and economic detective problem.

Corrective taxes; a method of internalizing negative externality

A corrective tax is designed to adjust the marginal private cost of a good or service in such a way as to internalize the externality. The tax must equal the marginal external cost per unit of output to achieve this objective. In effect, a corrective tax is exactly like a charge for emitting wastes. It is designed to internalize a negative externality by making sellers of the product pay a fee equal to the marginal external cost per unit of output sold.

However, the corrective tax does not reduce the pollutants to zero. It merely raises the costs of using the stream for instance to reflect the marginal damage done to alternative users of stream.

In summary, corrective taxes cause the following results:

- An increase in the price of the good and a reduction in the quantity demanded, to the efficient level, where the marginal cost equals the marginal social benefit of the good;
- A consequent transfer of income away from the product and consumers in favor of individuals who use the recreational services of for instance the streams and of others who might have their taxes reduced or enjoy the benefits of increased government services if the revenue collected is used for those purposes;
- A reduction in, but not the elimination, of the use of the service and a consequent reduction in damage to alternative users of the service or good.
In view of the above, the following predictions can be made concerning political support for the enactment of such corrective tax;
- Commodity producers, employees, and consumers will likely vote against it to the extent to which they are not involved in alternative uses of the service and will not be compensated for their losses;
- Recreational and commercial users of the service, as well as tax payers in general, will vote in favor of the corrective tax to the extent to which they have few interests in the product production or consumption.

Hence, to internalize the externality through the use of corrective tax will result in some groups receiving the benefits at the expense of other groups bearing the costs. In other words, the internalization of the externality also will result in income redistributive effects, which in turn, will influence the willingness of the individuals involved to support the scheme.

Corrective subsidies

This is similar to a corrective tax. However, a corrective subsidy is a payment made by government to either buyers or sellers of a good or service so that the price paid by consumers is reduced. The payment must equal the marginal external benefit of the good or service.

Examples of corrective subsidies include the provision of certain government services at levels below the marginal costs of such services. For instance, some city governments subsidize property owners who plant trees by the curbs of their property. They might, for example, pay half the price of those trees. This is designed to internalize the positive externality associated with property beautification.

Governments often provide services that result in positive externalities free of charge and establish minimum levels of consumption, as is commonly the case for elementary and secondary schooling. However, not all sub subsidies are designed to internalize positive externalities. Many subsidies are based on other goals, such as alleviating poverty.

The Coase Theorem

This theory states that governments, by merely establishing the rights to resource uses, can internalize externalities when transaction costs of bargaining are zero (Ronald Coase, 1960). Once these property rights to resource use are established, the theory holds that free exchange of established rights for cash payments among the affected parties will achieve efficiency. This holds irrespective of which of the parties involved is granted the rights.

Therefore, the willingness of people to engage in market transactions involving property or goods and services depend on both the gains expected from the transactions and the costs involved in acquiring those gains. Transaction costs include the time, effort, and cash outlays involved in locating someone to trade with, negotiating the terms of trade, drawing contracts, and assuming risks associated with contracts.

Transaction cost, depends in part, on property rights to use resources. For example, those who purchase the rights of others to pollute know that no other polluters will continue to cause damages after the deal is completed. Hence, these kind of externalities for which the Coarse theory is relevant are called ‘’ small number externalities’’. In dealing with this type of externality, or any externality for that matter, is useful to divide the parties into two groups: emitters and receptors. The essential social problem that exists for any externality is the disputed use of a productive resource.

The significance of this theory is that the efficient mix of output will result simply as a consequence of the establishment of exchangeable property rights. It makes no difference which party is assigned the right to use a resource. Provided the transaction costs of exchanging the rights are zero, the efficient mix of outputs among competing uses of the resource will emerge. When transaction costs of exchanging the rights the right to resource uses are low and the number of parties involved are few, a government need do no more than assign property rights. Bargaining among the interested parties will do the rest to achieve efficiency

The theory also points out that negative externalities are really disputes concerning the rights to use certain resources. The parties involved have conflicting claims on the use of certain resources for their own benefit. However, the use of the disputed resource for one purpose diminishes its usefulness for the other purpose. This emphasizes that the externality is a reciprocal relationship between the parties involved, with no need to label what Professor Nicholas call’’good guys or bad guys’’. The efficient solution, involving trade off between social value of competing resource uses, strikes a balance between net social value of both uses.

For example, the plight of a farmer. In recent years, significant concern has arisen about the problem of agricultural runoff. Increased use of chemicals by the farmer as well as new methods of raising livestock in confined places, have resulted in external costs, because these chemicals and organic wastes washed away by rains can cause offensive odors and illnesses stemming from contamination of drinking water. Hence, agricultural runoffs now had the effect of decreasing the usefulness of the area for housing purposes because of the potential contamination of wells and the discomfort caused by offensive odors

1.3 THE SCOPE OF GOVERNMENT ACTIVITY.

What would it be like to live in a nation without government? There would be no systems of courts to administer justice. Provision of national defense and internal security would be difficult or disorganized with no central government to maintain and supply the armed forces,etc. we all benefit from government activities and expenditures and annual government expenditures form a significant portion of the GDP. The scope of government activities looks at the role government plays in the allocation of resources and how individual choices influences what governments do, how policies of governments affect the incentives of workers, investors, and corporations to engage in productive activities.

The roles of governments in society is seriously contested because we differ in our assessment of costs and benefits of government programs. Many people think the role of government in the economy needs to be expanded and look to government to solve their own problems. Others thik the role of government in the economy is already excessive and would like its scale of influence reduced.

Government expenditures are financed mainly by taxes. Tax payers give up more of their income each year to support government activities than they do to satisfy their desires for such basic items such as food, clothing and shelter. Taxes collected by governments are so enormous than what tax payers pay on essential needs. Citizens benefit from the many goods and services made available by governments, but they also pay the costs of the services.

We differ in our views about what governments should and should not be doing in part because our valuations of the benefits we get from governments differ. We also disagree because of variation in the amount of taxes and other costs each of us pay.

This concern therefore can be considered in two angles concerning the extent to which the state through government and its organs should assume the responsibility of supplying goods to the economy, namely;

a) Theoretical angle

based on earlier considerations, it is possible to make out a case for the co-existence between the public and private sectors.

Two major issues can be approached from this perspective;

It can be contended that so far as providing pure public goods is concerned we should entrust the public sector with this job. If the task in left in the hands of the private sector, then the system is likely to suffer from inefficiency on account of the following reasons.

i) Market mechanism can supply only a priced good. This aimed automatically enforce the principle of exclusion of its use. As a result either the good would not be supplied at all, or the suppliers would try to deprive a section of the society from its use. Such an enforcement of the principle of exclusion will either be impossible or will be very costly to implement.
ii) To the extent that some of the external effects of the public goods cannot be priced (the non market external effects), there will be a divergence between the private and social marginal costs of the products. The supply of goods therefore, would not be at an optimum level. It would be either more or less than that.
iii) The market mechanism fails in the case of pure public goods since the users cannot be forced to reveal their demand preferences. The suppliers are faced with the problem of free riders.

b) quasi public goods.

As regards the quasi public good (that is, quasi private goods, it appears that the role of the state should be limited to those goods which have more of publicness in them while predominantly private ones should be left to the private sector and market mechanism. The precise field of the state activity has to be decided not only on the basis of efficiency of the public sector but also on the basis of political and social ideology of the state.

c) merit goods

Because of their Over riding importance, provision of such goods helps the economy in attaining a high level of efficiency and contributes to achieving of basic objectives of the society. Example, if the provision of advocating is left to the market as such, the cost of educating the children will have to be borne by their guardians. This would deprive many brilliant students of educational opportunities. Such as state of affairs would be bad both for the deprived persons and for the society as a whole. It would also lead to a general lowering of the standards of efficiency in the economy.

d) Market failures.

Market tend to operate in efficiently, anought other things on account of the existence of public goods and the absence of law of castant returns the problem is compounded on account of uncertainty of future, incomplete information both technical and economic and deliberate attempts on the part of sellers to influence demand forces through selling techniques.

Similarly, an unregulated market economy tends to exhibit instability in terms of important macro variables like income, employment, prices, and output and it is considered a legitimate function of the state to protect the economy against these destabilizing forces.

The state likewise, plays a connective and a locative role and comprises policies and actions of the government designed to contract the inefficient outcomes of market functioning. Lastly through its distributives role the state tries to bring income and wealth distribution through by concentrating economic power in line with what it considers proper.

e) Infrastructure.

The arguments in favour of this diction is that infrastructural facilities are now viable and require huge resources beyond the capacity of privte sector. These days the argument of commercial non viability is supplemented by that of the contribution which infrastructure makes to the productive potential of an economy.

Theoreticians show that growth of an economy is sum of contributions made by productive resources, technology, institutional framework and infrastructural facilities. The contribution of infrastructural facilities is termed total factor productivity (TFP). The provision of such facilities is considered a primary responsibility of the state, particularly because their spills over effects are now marketable.

Constraints

However, desirable the state may not be able to provide all those goods which have predominantly public elements in them for the following reason

i) the state may not have enough of resources particularly in an underdeveloped economy to undertake the supply of all goods which, theoretically, it should be providing to the economy on grounds of public ness. This means that there is a need to have a large number of goods in the public sector but the state cannot afford to undertake all these activities.
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 limitation is also stronger in the case of underdeveloped countries administrative machinery of such countries generally lacks in still, statistical information and so on.
iii) The efficiency in public undertakings is notoriously low. There is a lack of initiative and a proper system of incentives. Also, the public undertakings are expected not to follow the principles of commercial profitability in every case and the state may not be able to been the additional losses on account of expansion of its activities.
iv) The boundaries of government activities depend upon political and social acceptability of its policies. In some countries, social traditions and attitudes may not allow the government to expand its activities in certain direction. In some other cases, the political atmosphere may be against certain state activities. Hence, in a modern welfare state the state has a duty to take into account the above facts and there upon determine not only the scope of its own activities but also choose the extent to which it would like to regulate the working of the private sector. The state has to ensure, within its capacity, that through a proper use of the fiscal instruments at its disposal and through an appropriate use of the state sector, the productive resources of the economy are allocated efficiently, inequalities of income and wealth are reduced, the merits wants of the society are satisfied and so on. It is also expected to ensure that in the formulation of public budget any inherent contradiction between chosen objectives is resolved to the extent possible.

In summary, in the foregoing analysis, we have high lighted the rationale for public sector economics. We have also seen the constraints which limit the scope of state activity. But right through it had been assumed implicitly that to the extent government intervenes, it is able to bring about better allocative and distributive results. However, government activities by themselves do not ensure that the efficiency of economy would necessarily improve. Inefficiency can be as much in the sphere of government activities as in that of an unregulated market.

Tullock asserts that both the state and market mechanisms are imperfect instrument talities and it is a question of weighing the specific advantages and disadvantages of both. Stigler points out that while we consider the imperfections of a market system, we do ignore those of the public sector and thus rote in fovaur of the later.

1.3.1 Historical angle.

Before the advent of modern capitalism, the state used to intervene in the economic activities of the society to a substantial extent. Such, a system did not attract many criticisms because the society did not know the advantages of market mechanism with which to compare the advantages of state intervention. But as capitalism grow, the disadvantage of controls, especially in terms of producetive inefficiency, became apparent. Accordingly as a reaction to thus, a thesis developed that the state should govern the least in other words, to the extent possible, the provision of the goods should be left in the hands of the market guided private sector

Adam smith was the apostle of this thesis. He provided theoretical underpinnings for the “laissez faire” philosophy and was a great advocate of new regulated market mechanism. Adam smith believed that the market was capable of generating efficient signals for the economic units, however; even he recognized that there were certain goods the provision of which could not be left to the market forces. The market would not provide them either due to lack of commercial profitability or some other reasons. But all the same economy needed there goods for its won efficiency. These included social overheads, defence, and maintenance of law and order.

In due course of time, however, it was realized that more and more social wants satisfied the criteria of merit wants. The state, it came to be believed, was for the whole society and not for any particular section, as a result, the state was expected to work for its maximum advantage. Under influence of this philosophy, the state expanded its activities in various directions.

The concept of welfare states has now gained roots and almost every state swears by it. Welfare activities form a substantial portion of what every state does these days. The states are seized of the problems of economic stability, economic growth, employment, inflation, balance of payments, regional imbalances etc. provision of more and more social and economic services is being taken over by the state, including education, social security and administration of labour welfare measures etc. in some countries, this trend had been reinforced by nationalization and regulation of existing industries.

[...]

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Details

Title
Economic Activities and the State
Subtitle
Public Finance
College
St. Lawrence University  (SCHOOL OF POSTGRADUATE STUDIES)
Author
Year
2013
Pages
100
Catalog Number
V209298
ISBN (eBook)
9783656369318
ISBN (Book)
9783656369967
File size
862 KB
Language
English
Notes
Professor Sunday Nicholas Olwor is a career bureaucrat with the Government of Uganda where he has served in various administrative capacity for over 18 years. currently, he is lecturing management courses at St,Lawrence University and Islamic University In Uganda. He holds a BA(SS), PGDPAM,ILLM, JD, Doctor of Juridical Science and has keen research in democracy and transformation of legal institutions
Tags
economic, activities, state, public, finance
Quote paper
Professor Nicholas Sunday (Author), 2013, Economic Activities and the State, Munich, GRIN Verlag, https://www.grin.com/document/209298

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