Public finance and Private finance

Economics Uncategorized

Public finance deals with study
of income, expenditure, borrowing and financial administration of the government. Private finance is the study of income, expenditure, borrowing and financial administration of individual or private companies. Both public and private finance are fundamentally similar in nature but different from each other on various operational aspects. The similarities and dissimilarities between public and private finance have been explained below.

Similarities

1. Rationality:

Both public finance and Private finance are based on rationality.Maximization of welfare and least costfactor combination underlie both.

2. Limit to borrowing:

Both have to apply restraint with regard to borrowing. The Government also cannot live beyond its means.There is a limit to deficit financing by the state also.

3. Resource utilisation:

Both the private and public sectors
have limited resources at their disposal.So both attempt to make optimum use of
resources.

4. Administration:

The effectiveness of measures of the
Government as well as private depends on the administrative machinery. If the administrative machinery is inefficient and corrupt it will result in wastages and losses.

Dissimilarities

1. Income and Expenditure adjustment:

The government adjusts the income
to the expenditure while individuals adjust their expenditure to the income. Private
finance involves stitching coa according
to cloth available whereas public finance decides the cloth according to the need for the coat.
2. Borrowing:

The government can borrow from
internal and external sources; it can borrow from the people by issuing bonds.However, an individual cannot borrow from himself.

3. Right to print currency:

The government can print currency.
This involves the creation, distribution and monitoring of currency. The private sector cannot create currency.

4. Present vs. future decisions:

The public finance is more involved
with future planning and making long-term decisions. These investments could include building of schools, hospitals and infrastructure. The private finance makes financial decisions on projects with a short term vision.

5. Objective:

The public sector’s main objective is
to provide social benefit in the economy.The private sector aims to maximize personal benefit i.e. Profit.

6. Coercion to get revenue:

The sources of income of a private
individual is relatively limited while those ofthe Government is wide. The Government can use its power and authority.
7. Ability to make huge and deliberat changes:

The public finance has the ability
to make big decisions on income. For
example, it can effectively and deliberately adjust the revenue. But individuals cannot make such massive decisions.

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