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5.1.1 Objectives of Government Budget The government plays a very important role in increasing the welfare of the people. In order to do that the government intervenes in the economy in the following ways. Allocation Function of Government Budget Government provides certain goods and services which cannot be provided by the market mechanism i.e. by exchange between individual consumers and producers. Examples of such goods are national defence, roads, government administration etc. which are referred to as public goods. To understand why public goods need to be provided by the government, we must understand the difference between private goods such as clothes, cars, food items etc. and public goods. There are two major differences. One, the benefits of public goods are available to all and are not only restricted to one particular consumer. For example, if a person eats a chocolate or wears a shirt, these will not be available to others. It is said that this person’s consumption stands in rival relationship to the consumption of others. However, if we consider a public park or measures to reduce air pollution, the benefits will be available to all. One person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits, that is, the consumption of many people is not ‘rivalrous’. Two, in case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits. If you do not buy a ticket, you will not be allowed to watch a movie at a local cinema hall. However, in case of public goods, there is no feasible way of excluding anyone from enjoying the benefits of the good. That is why public goods are called non-excludable. Even if some users do not pay, it is difficult and sometimes impossible to collect fees for the public good. These non- paying users are known as ‘free-riders’. Consumers will not voluntarily a G7 pay for what they can get for free and for which there is no exclusive d v title to the property being enjoyed. The link between the producer and h re E m consumer which occurs through the payment process is broken and the o n government must step in to provide for such goods. m B There is, however, a difference between public provision and public y d production. Public provision means that they are financed through the t budget and can be used without any direct payment. Public goods may be produced by the government or the private sector. When goods are produced directly by the government it is called public production. Redistribution Function of Government Budget From chapter two we know that the total national income of the country goes to either the private sector, that is, firms and households (known as private income) or the government (known as public income). Out of private income, what finally reaches the households is known as personal income and the amount that can be spent is the personal disposable income. The government sector affects the personal disposable income of households by making transfers and collecting taxes. It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function. Reprint 2026-27