[Music]
[Music]
this video examines the nature of public
expenditure its purposes methods to
finance it government influences on the
private sector and comparisons between
the effectiveness of public expenditure
and private expenditure public
expenditure public expenditure is the
expenditure done by the public sector it
includes expenditure by the central
government and expenditure by the local
authorities or regional bodies and
state-owned enterprises there are two
broad categories of public expenditure
one is called exhaustive spending this
involves the public sector directly
buying goods and services such as buying
medical equipment paying the police and
building roads in this case the public
sector determines the use of resources
the other category is transfer of
payments transfers of money to people
for instance pensioners and the
unemployed and to firms in the form of
subsidies and grants this is non
exhaustive expenditure in this case the
government does not decide on the
allocation of resources the people and
firms receiving the financial support
make the decision through their
purchases government influence on
private sector expenditure the
government influences private sector
expenditure in a number of ways these
include taxing income and expenditure
providing subsidies giving grants
influencing the level of economic
activity private sector investment for
instance would be increased by the
introduction of government investment
grants a cut in corporation tax and a
cut in the rate of interest investment
grants would encourage private sector
firms to buy more capital goods a cut in
corporation tax will increase the
willingness and ability of firms to
invest a lower interest rate would
reduce the cost of borrowing to buy
capital goods
Vande would reduce the opportunity cost
of using retained profits to buy capital
goods
comparison of expenditures by public and
private sectors there is some debate as
to whether public or private sector
expenditure leads to a more efficient
allocation of resources do households
and firms make better decisions or the
government in practice there are
advantages and disadvantages of both
private and public sector expenditure
and new airport for instance could be
built by the private or public sector
there may be a number of advantages in
it being built by a private sector firm
the profit incentive and force of
competition may imply that it would aim
to build a high quality Airport at low
cost and in less time there is a risk
however that a private sector firm may
be a monopoly and hence may not be
forced to keep its costs low thus it may
charge a high price for building the
airport also a private sector firm will
also take only private costs and
benefits into account using public
expenditure to build an airport may also
have its own drawbacks knowing that the
state is paying a state-owned
enterprises or private sector firm hired
by the government may not keep its costs
down a state-owned enterprise may lack
the commercial expertise to complete the
project on time the may also he delays
in decision making by the government to
go ahead with the project a major
benefit however of a major investment
project being undertaken by the
government is that it will base its
decision as to whether to proceed with
it on the consideration of all factors
involved that is social impact costs and
benefits it is likely to carry out a
cost-benefit analysis CBA in the place
cost-benefit analysis involves measuring
all the costs and benefits involved in
the case of an airport the private costs
will involve the cost of the labor
employed to build and run the airport
and of the building material and
maintenance the major private revenue is
the money that will be earned after
measuring the private costs and benefits
the economists carry out
cost-benefit analysis then seek to place
a value on external costs and benefits
this is not an easy process the external
costs may include operation of the
airport damaged to the environment noise
due to risk of accidents and congestion
near the airport
the external benefits may include
employment in the area due to tourism
and making it a more attractive as a
site for domestic firms and
multinational corporations when all the
calculations have been made the social
costs and benefits are compared if
social costs exceed social benefits the
government will not proceed with the
project if social benefits exceed social
costs it will go ahead if the net social
benefit is greater than that on rival
projects there will still be a debate
however on whether it is the best use of
government money government expenditure
on one item always involves a
significant opportunity cost the money
could have been spent on for instance
education cost benefit analysis --tz-- a
method of assessing investment projects
which takes into account social cost and
benefits
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