This post thoroughly covers the 1st topic of Unit 4 that is AHSEC Class 12 Economics Government Budget, meaning and objectives. Definition of government budget along with the meaning of all important terminologies are also covered. Different types of goods such as public goods and private goods and their difference also discussed in a very effective way.
GOVERNMENT BUDGET
Meaning of Government Budget
(AHSEC Class 12 Economics Government Budget)Government Budget is an Annual Financial Statement which shows the Estimated receipts and Estimated Expenditure during a fiscal year.
Important Points of Government Budget
- It is prepared at 3 levels mainly by: Central government, State government, and Local self government.
- The Budget prepared by the central government is known as the Union Budget.
Objectives of Government Budget
The Government plays an important role in increasing the welfare of the people through Budget in the following ways:
- A) Allocation Function
- B) Redistribution Function
- C) Stabilization Function
- B) Redistribution Function
Explanation
A) Allocation Function of Government Budget
Govt. provides certain goods and services which can't be provided by the Private Players. E.g. Roads, governance, administration, defence etc.
The goods which are provided by governments are known as Public Goods.
GOODS ARE CLASSIFIED INTO TWO TYPES
- Public goods
- Private goods
| BASIS | PUBLIC GOODS | PRIVATE GOODS |
|---|---|---|
| MEANING | It refers to those goods which can be collectively used by the people. | It refers to those goods which can be used only by those who are willing to pay for it. |
| NATURE | It is generally Non-rivalrous and Non-excludable. | It is generally Rivalrous and Excludable. |
| USER | Generally, the users of Public goods are Free riders that is they do not pay the money directly for using the public goods. | Generally, the users of Private goods are not Free riders that is they do pay the money directly for using the Private goods. |
| EXAMPLE | National Defense, Roads, Street Lights, Public Parks etc. | Private Cars, Private Houses, Clothing etc. |
BASIC TERMS
Rivalrous :- It means one person prevents another individual consumer from consuming it. It means simultaneous consumption of a rivalrous goods by more than 1 person is not possible.
Excludable :- It means excluding or preventing the consumers who have not paid for goods.
Free rider :- A person who does not pay for Non-exclusive goods and gets benefits.
Public Provision :- The Provision which is financed through budget and can be used without any direct payment.
Public Production :- When the goods are produced directly by the government, it is known as the Public Production which can be obtained with payment.
Note :- In case of Private goods, anyone who does not pay for the goods can be excluded from enjoying the benefits. For eg:- If a person does not buy a ticket he will not be allowed to enter cinema hall for watching movie.
However, in case of Public goods it is difficult to exclude anyone from enjoying the benefits of the goods.
B) REDISTRIBUTION FUNCTION
The aim of the government is to promote equality by reducing the inequalities of income and wealth through its budgetary policy.
Spending on the welfare of poor people through it
The government imposes taxes on luxury goods, harmful goods and on the income of rich people which reduces the income of the rich raising the standard of living of poor. This helps in reducing the inequalities in distribution of income.
Government also promotes regional equality by encouraging the business units to set up the industries in economically backward regions.
C) STABILIZATION FUNCTION
Government budget is used to prevent the situation of inflation and deflation to achieve the objective of economic stability.
A) Aggregate Demand > Aggregate Supply
In this situation, the excess demand leads to Inflation which is controlled by Government by:
Reducing the public expenditure
B) Aggregate Demand < Aggregate Supply
In this situation, the deficient demand leads to Deflation which can be controlled by Government by:
Increasing the public expenditure
Helped a lot