Public Finance & Public Finance & BudgetingBudgeting

Dr. Adnan A. AlshihaDr. Adnan A. Alshiha

IntroductionIntroduction Public FinancePublic Finance: as field of study is the study of : as field of study is the study of

political economy.political economy.

EconomicEconomic: examine the working of a market : examine the working of a market system.system.

PoliticsPolitics: examine the organization and the : examine the organization and the process through which social decision are process through which social decision are made.made.

The The two must jointwo must join in studying the effect of in studying the effect of political (collective decision ) on the economy. political (collective decision ) on the economy.

The study of public finance involve The study of public finance involve two stagestwo stages::

What government try to accomplish What government try to accomplish and how efficient are its effort in and how efficient are its effort in attaining its objective?attaining its objective?

How do institutions organized to carry How do institutions organized to carry out collective objectives affect the out collective objectives affect the behavior of individuals in the market behavior of individuals in the market economy economy

Public EconomyPublic Economy

The no-government economy.The no-government economy.

The all-government economy.The all-government economy.

Government as an economic unit.Government as an economic unit.

Collective goods and services.Collective goods and services.

The no-government The no-government economyeconomy

Assume there is no government Assume there is no government The economic organization: consists The economic organization: consists

of two units: of two units: individual or familiesindividual or families Business unitsBusiness units Trade takes place in two markets: Trade takes place in two markets: Market for consumer or final goods Market for consumer or final goods

& services& services Market for productive servicesMarket for productive services

The Wheel of IncomeThe Wheel of Income

Business families

Final good and services market

Factors of production market

Economic OrganizationEconomic Organization

Private people “trade” Productive Private people “trade” Productive services for final productsservices for final products

Firms buy productive services and Firms buy productive services and transform them into final productstransform them into final products

Business exist Business exist

Principle of consumer Principle of consumer SovereigntySovereignty

One Riyal One VoteOne Riyal One Vote

Individuals express their desire Individuals express their desire based on their willingness and ability based on their willingness and ability to purchase.to purchase.

Advantages of Voluntary Advantages of Voluntary EconomyEconomy

Individual are free within the limit of Individual are free within the limit of their economic power.their economic power.

High degree of efficiency High degree of efficiency

Market DisadvantagesMarket Disadvantages

Social injusticeSocial injustice MonopolyMonopoly InstabilityInstability Prices do not correspond as quickly Prices do not correspond as quickly

as the change in individual taste or as the change in individual taste or preference.preference.

Complex economic interdependenceComplex economic interdependence

The All Government The All Government EconomyEconomy

Collectivity of choiceCollectivity of choice

One man One voteOne man One vote

Collective ConsumptionCollective Consumption

Indivisible goodsIndivisible goods

Decision is made through political Decision is made through political processprocess

The Potential for tradeThe Potential for trade

Individual provided with uniform Individual provided with uniform quantity.quantity.

Preferences among individual are Preferences among individual are different.different.

If good is Technologically divisible If good is Technologically divisible trade occur.trade occur.

Collective Organization and Collective Organization and Economic EfficiencyEconomic Efficiency

Varying preferences can not be Varying preferences can not be expressed.expressed.

Low Efficiency.Low Efficiency.

Efficiency defined in term of the Efficiency defined in term of the degree to which individual degree to which individual preferences are satisfiedpreferences are satisfied

Collective Organization and Collective Organization and DistributionDistribution

High equality in distribution of goods High equality in distribution of goods and services.and services.

The World of EqualThe World of Equal

Preference are the same.Preference are the same.

Ability are the same.Ability are the same.

no difference in the working of an no difference in the working of an economy organized on Market line economy organized on Market line and one organized on collective lineand one organized on collective line

Equal Abilities Equal Abilities Differentials PreferencesDifferentials Preferences

The relative advantages of The relative advantages of marketmarket over collectivist economic over collectivist economic organization become apparent.organization become apparent.

Different Ability Equal Different Ability Equal PreferencePreference

This provides the strongest support This provides the strongest support for for collectivistcollectivist organization of the organization of the economy.economy.

Different Ability Different Ability Different PreferenceDifferent Preference

Contrast based on human natureContrast based on human nature

Market advocates: Different ability Market advocates: Different ability

because in Tastebecause in Taste

Government advocates : basic Government advocates : basic differences in capacities of human differences in capacities of human being to produce economic value.being to produce economic value.

Saudi Arabia EconomySaudi Arabia Economy

Mixed Economy (market- Mixed Economy (market- collectivized) collectivized)