Public Finance And Its Importance

Importance of Public Finance:

Taxation: The consumption of cigarettes, alcohol, opium, and other commodities that fall within that general category need to be discouraged.

Protection of Infant Industries: If the infant and newly started firms or industries in developing nations are allowed to struggle with foreign firms especially from those technologically advanced countries, they may not survive due to many reasons and factors.

Provision Public Goods: Governments provide a public good, the government-financed items, and services such as roads, military forces, lighthouses, and streetlights. Private citizens even the wealthy ones would not voluntarily pay for these services, and therefore businesses have no incentive to produce them.

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Side Effects of a Market Economy: Public finance also enables governments to correct or offset undesirable side effects of a market economy. These side effects are called spillovers or externalities. To correct a spillover, governments can encourage or restrict certain activities. For example, governments can sponsor recycling programs to encourage less pollution, pass laws that restrict pollution, or impose charges or taxes on activities that cause pollution.

Redistribute of Income: Governments redistribute income by collecting taxes from their wealthier citizens to provide resources for their needy ones. The taxes fund programs that help support people with low incomes.

Equity: Public finance plays a great role in eliminating or reducing the inequalities of income and wealth in a capitalist economy. This is achievable by transferring the purchasing power from the rich to the poor. 

When governments impose progressive taxes on the richer members of the society and provide various facilities such as subsided food, housing, free medical aid, and education to the less privileged members of the society, that is what is called equity. 

 Public finance provides government programs that moderate the incomes of the wealthy and the poor. 

These programs include social security, welfare, and other social programs. For example, some elderly people or people with disabilities require financial assistance because they cannot work.

Subsidies and grants: In modern times, subsidies and grants are inevitable for producing essential goods and services meant for the masses. 

It has a prominent place in the government expenditure of developing countries. 

Optimum utilization of resources: The natural resources of developing countries are underutilized or over-utilized. 

The proper utilization of natural resources is imperative not only for the present generation but also for the unborn generations. 

The state can direct the flow of production, consumption, and distribution in the economy by framing a suitable budget policy.

Economic planning: Government usually has rolling plans for more than a year, times the implementation of say five-year plan tends to require a huge fund. 

Thus, the government needs to combine resources, taxation, and public borrowing effectively.

Providing employment opportunities: The government has to spend a huge amount of public expenditure to provide purchasing power to the general masses and reduce the problem of unemployment in the economy. 

Market Failures: These are the market inadequacies or private sector of the economy fails to address and fail to satisfy all the needs of the society. 

Often the market fails in providing the society’s desired set of goods and services and the distribution of income and poverty.

It also fails in achieving stability in employment and prices. 

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