UNIT 13 – PRIVATE EXPENDITURE VS PUBLIC EXPENDITURE The expenditure incurred by the public sector, such as the central government, local authorities or regional bodies and state owned enterprises is called public expenditure. It is distinguished into two categories: i. exhaustive spending – expenditure that relates to public sector buying goods and services, example: buying medical equipment, paying the police, spending on roads, ports, dams, telecommunications and other infrastructure, including spending on education ii. transfer payments – payments made to consumers, such as pensioners and the unemployed, and firms in the form of subsidies and grants NOTE: The public sector allocates the resources for exhaustive spending, while, the individuals and firms allocate the resources with their purchase, in the case of transfer payments. Government spending is frequently related to some sort of market failure. The following are some of the expenditures incurred by the government: i. Ensure that adequate amounts of public and merit goods and services are consumed such as national defense, monetary stability, law and order, educational and health services, etcetera. ii. Redistribution of income so that the gap between top and bottom income earners do not widen significantly. Social security spending is the largest category and it includes state pensions, unemployment benefits, disability benefits, and etcetera. iii. iv. v.
Regulate markets e.g. to enforce product safety and hygienic standards, to guarantee that competitive conditions prevail, to guarantee environmental standards, etcetera. Stabilize and manage the economy, including promoting employment. Help the private sector industries with subsidies and grants.
There is a conflict between the provision of goods and services directly to people and asking them to pay for the goods and services. The law of demand dictates that, as the price of a good or service rises, less of it will be consumed. Health care and education are underconsumed in some countries because people cannot afford to pay. In the short term this has a negative effect directly on the quality of their lives, and in the long term it causes a potential decrease in life expectancy and earnings potential. This impacts upon the whole of society because it means that human resources are not being used to their full capacity. The advantages of government provision of goods and services are that: the goods and services are accessible to all people, regardless of their income or social status consumption of the goods and services has private benefits to the individual and external benefits enjoyed by third parties in society The disadvantages of government provision of goods and services are that: there is an opportunity cost, as the money could have been spent on something else, such as paying off government debt or possibly lowering the rate of taxation © Niaz Mahmud
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goods and services that are free of charge may be over-consumed, so long queues or shortages may arise, e.g., the waiting list for a MRI diagnostic test in a government hospital may be very long in the case of a shortage of supply due to excess demand, it can be difficult to decide who should be able to take advantage of the free government service free rider problem exists as people can take advantage of free goods and services without contributing to government revenue through paying taxes
© Niaz Mahmud
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niaz.mahmud@gmail.com niaz@harmonicinvestment.com