The document summarizes several lectures on public finance: 1. The first lecture introduced students to the course and provided an overview of public finance concepts like expenditure, revenue, deficit, and the roles of foreign aid, borrowing, and monetary policy. 2. The second lecture discussed a student field visit experience to relate practical planning, budgeting, monitoring, and evaluation skills to the subject. 3. Subsequent lectures covered topics like public versus private goods, the role of government in the Great Depression, theories of public expenditure, canons of public expenditure, and Wagner's Law and the Wiseman-Peacock hypothesis about increasing public activities over time.

1. Lecture on Public Finance Econ 301
B DEVS AND BDFIN THIRD YEAR started from August 14,2012
Lecture I
Introduction of students and the teacher
Overview of the Course What is Public Finance ? Expenditure,
Revenue, Deficit which is met from Foreign aid , Borrowing ( Internal
and External loan )and printing of notes. Financial System and the role
of Nepal Rastra Bank (central Bank), Monetary Policy
Lecture 2
Participation of students is needed and ensured. In order reinforce
student participation, two students are asked to summarise the
lecture.
Example given from the students field visit : how they plan ( Program
and activities) , how they budget ( budget ceiling, item wise
expenditure ) and how they monitor(each evening presentation of the
findings and correction of activities if required ) and account keeping
and paper work and evaluation ( Final presentation and assessment by
the teachers).
Objective To give exposure in the field –real world
Mission To give them opportunity to explore the life in the field
Vision To give them chance to interact with the government officials
and the people at the grassroot level about their work , lifestyle and
social and economic condition.
Plan consists of
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2. a) Activities b) Budget c) Monitoring and
evaluation
Activities are What When How and Where, Detail action Plan is needed
which is measurable and monitorable.
Activities are translated into financial terms. How to spend and where
the resources are collected from.
Monitoring and Evaluation is to keep track of progress and enable us
to correct the course of implementation, if necessary.
Plan is the reflection of people’s want.
Budget is the modyfing factor of the want , it means availability of
money and resources determine whether the plan and activities are
realistic or not. Monitoring and evaluation are the stock taking of the
capability of implementation and opportunity for the correction of the
course of action.
Relate this student experience in the field visit to the subject matter of
the Public Finance.
Lecture 3
How do you allocate Rs 500,000 if you get it from your father or
mother or brother or sister
Submit Expenditure Plan . Why did you select the expenditure head
and how did you allocate expenditure amount. Give justification.
Public Goods vis a vis Private Goods
Private Goods : Exclusivity, Price, divisibility, Property Rights, profit
motive
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3. Public Goods : Non exclusivity, Marginal cost zero, no price, benefits
jointly and equally shared. One persons partaking of benefits does not
reduce the benerits available to others Air pollution control, Radio Fm
Mountains etc.
Since goods are available to all , consumers are not willing to pay. The
cost of the social goods is borne by the government.
Its significance and implication in the economy
Public goods vis a vis Private goods
Public goods
1 Benefits to which social goods give rise are not limited to
one particular consumer who purchases the goods. It is
jointly and equally consumed by the beneficiaries.
2. One person’s partaking of benefits does not reduce the
benefits available to others > Air pollution control. One
person consumes the goods, it is not possible to prevent
others from consuming it.( Excludability)
3 Indivisibility Public goods can not be divided into pieces.
4There is no property rights
5 Since goods are available to all , consumers are not
willing to pay. The cost of the social goods is borne by the
government.
Private Goods
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4. Property rights
Exclusivity ( Exclude those who cannot pay the price)
Price
Rivalry.
Profit motive
The Lecture is based on H L BHATIA “ Public Finance” page 2
Musgrave and Musgrave Page 7
Lecture 4
Discuss the Great Depression 1929-33. Role of the Government in the
economy- Laissez Faire Vis a Vis Modern Keynesian view.
Great Depression 1929-1933
Two significance of the Great Depression – Human suffering and the change
in the government behavior in the field of public finance.
Started in USA, Stock Market Crash on October 29, 1929
Americans lost 30 percent of the share price in a single day.
Price of Stock plummeted by a huge margin
International trade plunged by half to two third as did personal income, tax
revenue, prices and profits
Construction was virtually halted in many countries
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5. Crop prices fell by roughly 60 percent.
Primary sectors such as farming , mining, logging suffered the most/
As personal income declined, consumers cut back their expenditure
Unemployment was high and there were few other jobs
Protectionist policy of the USA and retaliatory tariffs in other countries
exacerbated which led to the collapse of the global trade.
The non-interventionist policy of the previous years was changed to active
government intervention. There was increase in government expenditure(
deficit financing), subsidy to the farmers, welfare expenditure.and Acts to
regulate the economy
It is said that “ The great depression caused government intervention
,government regulated economy , and the establishment of the welfare
state. “ It gave human face to the government policy.
Source of information “The Great Depression” in Wickipedia
First Five Year Plan of the USSR in 1928, which was the first attempt
in the economic history of the World to coordinate the economic and
budget policies at the macro level with a view to expedite the rate of
economic growth.
Lecture 5
Theory of Public Expenditure ,
Classical Economists ( Adam Smith 1776 “ The Wealth of Nations”)
were of the view that least interference from the government is
desirable in the economic development of a nation.
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6. The Laissez Faire economists had a dominant role in those days .But
this view was jolted and was forced to revise after the Great Depression
of 1929-1933. The active role of the government was acknowledged
and recognized , so the Keynes views prevailed. When the Welfare
Economics was propounded, the state’s role as an investor, regulator,
and welfare was paramount.
The starting point for the expenditure theory is the failure of the
market mechanism of the laissez faire economy. H . L .BHATIA pages
218-225
First Theory Range of public expenditure in the context of public goods
and private goods. Production of road, bridges, hospital, schools,
telecommunication, hydropower etc.
Ratio of government expenditure to GDP. It is a question of size of the
budget which is determined through the principle of maximum Social
Advantage.
Second Theory. It asks the question what public expenditure wants to
achieve for the members of the society. What are the objectives ? –
A Critical minimum needs like law and order,justice, peace
B Growth
C Distributional justice( Equity, poverty alleviation, regional
development, gender equity)
D Welfare. .
Criticism : It is difficult to identify the needs of the
society. This question is addressed through vote.
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7. Canons of Expenditure H . L .BHATIA pages 233-235
Judicious use of public funds with associated legal propriety needs to
be ensured.
1Canon of Economy .The Government uses resources directly or
places at the disposal of the society. There should be no wastage, Do
not spend more than what is necessary
2 Canons of Sanction No public funds should be used without proper
authorization .Further that funds must be used only for the purpose
for which they have been sanctioned
3 Canon of benefit Public fund should be spent only if it is beneficial
to the society. It is the principle of maximum social advantage.
Allocation is made in different heads of expenditure.
4 Canon of Surplus. Avoid deficit budgeting
Lecture 6
Increasing Public Expenditure Why?
Wagner’s Law of Increasing State Activities H . L .BHATIA pages 219
Mushgrave and Mushgrave “ Public Finance”
Adolph Wagner born in 1835 died in 1917 examined historical facts,
primarily of Germany. According to him, there are inherent
tendencies for the activities of different layers of a government to
increase both intensively and extensively. There is a functional
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8. relationship between growth of the economy and the government
activities with the result that the government sector grows faster than
the economy.
A number of reasons can be enumerated for this inherent long-term
tendency recorded in history.
1.An expansion in the traditional functions of the state. Defence is
increasingly more expensive.
2. State activities were increasing in coverage. Pensions, subsidy, direct
provision of merit goods .
3 Expand the provision of public goods. Government investment in
these activities.( road ,bridges, investment etc)
Wagner’s Law was based upon historical facts. It emphasized on the
long term trend rather than short term changes in the public
expenditure. He assumed that the economy functions smoothly
without social disturbances.
Additional factors which contribute to the tendency of increasing public
expenditure relate to the growing role of the state.
i. Growing population so make provisions for school ,
health facilities, drinking water
ii. Increasing urbanization – traffic , roads etc.
iii. The size and nature of public services necessitates an
ever increasing specialization.
iv. Protect the economy from the failures of the market
economy
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9. v. Public debt
vi. Capital accumulation
vii. Vested interests to develop which demand an increase
in public expenditure for own benefit
viii. Government bureaucracy has a tendency to expand.
Wiseman- Peacock Hypothesis H . L .BHATIA pages 223
Second thesis dealing with the growth of public expenditure was put
forth by Jack Wiseman and Allan T. Peacock.,in the book “The Growth
of Public Expenditure in the United Kingdom, 1890-1955”
The main thesis is that public expenditure does not increase in a
smooth and continuous manner, but in jerks or step like fashion. At
times, some social or other disturbance takes place, creating a need for
increased public expenditure which the existing public revenue cannot
meet.
Displacement Effect : The movement from the older level of
expenditure and taxation to a new and higher level is the displacement
effect/
Inspection effect: The inadequacy of the revenue as compared with the
required public expenditure creates an inspection effect. Need to
review the revenue position and the need to find a solution of the
important problems that have come up and agree to the required
adjustment to finance the expenditure. They attain a new level of tax
tolerance. They are now ready to tolerate a greater burden of taxation
and as a result the general level of expenditure and revenue goes up.
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10. Thus each major disturbance leads to the government assuming a
larger proportion of the total national economic activity.
Concentration Effect. Above mentioned fact is also called
concentration effect.
Both of them are emphasizing the recurrence of abnormal situations
which cause sizeable jumps in public expenditure and revenue.
Madhab Ghimire
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