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 differences between public
and private finance have been explained below. SIMILARITIES:
1. Objective Satisfaction of human wants is the main objective of
both public and private finance. The main aim of public finance is to satisfy
social wants and that of private finance to satisfy individual wants
2. Principles The principle of maximum
social benefits is the guiding principle followed by the government while
spending its income. Individuals also follow the principle of maximum
satisfaction when spending out his given income .
3. Income, Expenditure and borrowing The
resources or the income for both government and the individuals are limited .In
case of shortage, borrowing can be done for both and both are under obligation
to repay the borrowed money.
4. Policies Both the private and public
finances adopt policies for maximizing welfare. In Private finances as well as
in public finance only sound policies will enable maximization of welfare and
benefits.
5.
Administration The effectiveness and
success of measures adopted by private and public sector depends on the
administrative machinery. If the administrative machinery is inefficient and
corrupt it will lead to losses and wastages.
Dissimilarities:
1. Magnitude : The most significant difference between the two types
of finances is in terms of size and magnitude. Households and businesses have
relatively smaller amount of resources available to them and hence their
budgets are smaller in size as compared to those of governments.
2. Public Scrutiny: Personal budgets of
households are a private affair and not made public. In case of business
finance, the budget is made known to the stakeholders and General public for
information and scrutiny. In case of public finance, every budgetary decision
has to be made known to the people of the nation.
3.
Source of revenue: Private economic
units earn their income by using assets owned by them. Their sources of income
are salaries, wages, interest, rent and profits which arise out of
transactions. In case of governments, the sources of income are taxes and non
tax revenues. In case of taxes, fees, fines, fines there in an element of
compulsion
4Sources of borrowing: Private economic
units may borrow from informal sources like friends, relatives ,moneylenders as
well as from formal sources like banks and financial institution. Public bodies
can borrow almost on a continuous basis from internal and external sources.
They can borrow from the people, the central bank, Commercial banks and other
financial institutions as well from external sources.
5. Motive: Incase of public finance,
the decisions are reached through political and administrative procedure and
based on common social objectives. A private finance is governed by profit
motive for businesses or satisfaction of wants of individuals and households.
6.
Time dimension: Both private and
public financial activities try to balance between the immediate objectives and
future goals. But private economic units, especially households, are primarily
focused on fulfillment of present and immediate wants. In case of public
authorities, the focus is on both present and future
7. Income Expenditure adjustment: Generally,
while a private economic unit adjusts its expenditure to income, public bodies
adjust income to expenditure. Private finance will try and adjust expenditure
according to income and in order to do so may even forego fulfillment of
certain wants. On the other hand, Government are guided by welfare and growth
consideration for which expenditure have to be predetermined. Since they have
the power to raise fund through taxation, borrowing, deficit financing, they
try to adjust their revenues to the predetermined expenditure requirements.
8.
Assessment of outcomes: It is much
easier to measure and evaluate the outcome of private financial activities than
the outcome of public financial activities. In case of private economic units,
the outcome may be measured by profits of business, fulfillments of wants of
households. In case of public finance, the outcome has to measured and
evaluated in terms of multiple parameters. These are social welfare, economic
growth, security, Productivity and efficiency.
9. Nature of the budget: Private
economic units aim at surplus budget. Having a surplus is considered
economically prudent. This is not the case with government budgets. In
countries that need to grow and develop rapidly, deficit budgets need to be
followed. A long term surplus budget indicates that the government may not be
fulfilling some of its obligation.
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