Public finance is the study of income, expenditure, borrowing and financial administration of the government. Private finance on the other hand is the study of the income, expenditure, borrowing and financial administration of the individuals and private firms.
Similarities between Public and Private Finance
Both public and private finance aims at the satisfaction human wants. The objective of public finance is to satisfy social wants and that of private finance is to satisfy individual wants.
Both government and individual follow similar principles. The government follows the principle of maximum social benefit while spending its income.
Likewise, an individual follows the principle of maximum satisfaction when spending his income.
Income, expenditure and borrowing:
Both government and individuals have similar but limited resources/income, from which expenditures are made. If their incomes are insufficient to meet their expenditure, they borrow to repay afterward.
Both government and private individuals and firms make good and not so good financial policies sometimes.
Sound financial policies lead to maximization of social and individual welfare, respectively. The opposite happens when reverse is the case.
The two sectors require efficient administration for their success. If the government is corrupt and inefficient, it will lead to misuse and wastage of finances and so is the case with the individual or company.
Differences between Public and Private Finance
Adjustment between income and expenditure:
The government first estimates its expenditure and then goes to find how to raise the required amount.
The individual on the other hand, determines his expenditure on the basis of his income. While the individual says “I have so much to spend” the government says “I have so much to raise”.
However, this difference is not perfectly rigid. Under certain circumstances, an individual may work harder to increase his income in order to meet his ever increasing demands/wants and the government adjusts its expenditure to income during economic recession.
There are differences in the nature of expenditure between the two. While an individual’s expenditure is dictated by his income, habits, fashion, taste etc.; the government expenditure is a function of its economic and social policies, like removing unemployment and poverty, reducing income inequalities, providing infrastructural facilities etc.
In public finance, there is compulsion in payment of taxes, failure of which attracts punishment by fine and imprisonment.
But an individual or firm cannot enforce compulsion on anybody to pay him money. Also, the government can compel people/institution to lend it money during war or emergency while the individuals cannot.
Public finance has more/greater elasticity than private finance. The government has more means of income whereas the resources of the individual are limited.
The government has the whole wealth of the nation/community to draw from, in addition to the possibility of raising income externally. But the income of the individual is limited to his current earnings, savings and borrowings.
The motive of public finance is public welfare while for private finance, the motive is profit. However, some government public enterprises which are run on profits are meant for public welfare.
The duration and nature of public and private budget differ. Public budget is usually for one fiscal/financial year but that of the individual can be daily, weekly or monthly etc. while the government can have a surplus, deficit or balanced budget, the individual tries to have a surplus budget so as to save for the future; though occasionally he can have a deficit budget by borrowing.
Further, the budget of the government is passed by the parliament but that of the individual/firm is usually without any controlling authority.
Law of equimarginal authority:
The government seek to maximize social welfare based on the law of equimarginal utility, but cannot often follow this principle because large volume of its expenditure is of a fixed nature and cannot be changed to equalize marginal utilities.
Further, the government expenditure may be influenced by non-economic considerations such as political pulls and pressure that do not maximize social welfare.
But the individual on his own spends his income on various goods and services in such a way that the marginal utilities of these expenditures are equal.
Secrecy versus openness:
The government finances are usually of open knowledge. The budget is an open public document, which is commented and debated upon and published at various forms.
Private finance, on the other hand, is not given to openness, unless under certain conditions.
Present versus future:
The government is a permanent structure/organization and as such is usually concerned with both the present and future generations’ welfare, while the individual is mainly concerned with his present welfare, profit and gain because of life’s uncertainties.
The government can only face financial crises and but not go bankrupt. It has many sources of income, even deficit sources e.g. borrowing. But the individual or firm can be bankrupt.
The government has the responsibility, power and authority to print notes to meet requirements during wars, emergency etc and for economic development.
But the individual has nothing to do with printing notes/minting currencies.
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- Instruments of Monetary Policy
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- Value Added Tax (VAT)
- Taxation | Characteristics & Objectives
- Fiscal Policy | Definition & Objectives
- Canons of Taxation
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- Public Corporation | Characteristics | Problems & Types
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- Factors determining taxable capacity
- Government budget