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Home » Finance » Public Finance » Public Finance & Private Finance

Public Finance and Private Finance

Public Finance and Private Finance are two branches of finance.

Finance can be divided into two broad categories :-

  1. Private Finance
  2. Public Finance

Private Finance can be categorized into :-

i.Personal Finance :-

It basically deals with the optimization of finances in the individual (single consumer, family, personal savings, etc.) level subjected to the budget constraint. For example, a consumer can finance his/her purchase of a car by taking a loan from any bank or financial institutions. In short, it can be said that Personal Finance is financial planning on the individual level. It deals with the utilization of the monetary resources by individuals and families by means of budgeting, saving and spending after taking into consideration the probable life events of the future and risks associated with them. Personal Finance generally includes :-

(a)Savings account
(b)Insurance policies
(c)Consumer Loans
(d)Stock market investments
(e)Retirement plans
(f)Managing of income taxes
(g)Credit cards

ii.Business Finance :-

It tries to optimize the goals (profit, sales, etc.) of a corporation or other business organization by estimating future asset requirements and then allocating funds in accordance to the availability of funds.

Business Finance deals with the monetary provisioning at the commercial level. A business constantly requires capital based on different perspectives :-

Short term and medium term capital are used for meeting current liabilities. Long term capital are generally utilized for acquiring fixed cost assets (like land, machinery, etc.), investment in patents and trademarks, etc. Sources of short term and medium term capital includes retained earnings, temporary loans from sister concerns or directors, exchange bills, and many more. Long term Capital sources are commercial banks, finance houses, merchant banks, etc.

Public Finance is that part of finance which hovers around the central question of allocation of resources subjected to the budget constraint of the government or public entities. It is that branch of economics which identifies and appraises the means and effects of the policies of the government. Public Sector Finance tries to examine the effects and consequences of different types of taxation and expenditures on the economic agents (individuals, institutions, organizations, etc.) of the society and ultimately on the entire economy. It also analyzes the effectiveness of the policies aimed at certain objectives and consequently to the development of procedures and techniques for increasing the effectiveness of the policy.

Professor Richard Musgrave defined Public Finance as, “The complex of problems that centres around the revenue-expenditure process of Government is referred to traditionally as public finance.”

Some of the branches of Public Sector Finance are :

(1)Public Revenue

It includes revenue earned by government from both tax (income tax, sales tax, import duty, etc.) and non-tax sources (different kinds of fines, fees, etc.).

(2)Public Expenditure

It deals with the various types of expenditures of the government required for its proper functioning.

(3)Public Debt

When the public expenditure of a government exceeds its revenue, for continuation of its proper functioning, the government borrows from the public giving rise to public debt. Subject matters under this head are :-

(a) Total amount of public debt
(b)Redemption of public debt
(c)Impact of public debt on different policy matters

(4)Budgetary Policy

Public or budgetary deficit arises when public expenditure exceeds public revenue. This branch of public finance deals with the different ways of solution of public deficit.

(5)Fiscal Policy

Fiscal Policy is concerned with the policy framework of the government after taking into consideration government spending, avenues of government earning, government borrowings, etc. Hence, Public Finance and Private Finance are different from each other by the fact that one is dealt in a public domain and the other on the individual level.



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