However, when it comes to providing public or social goods (e.g. parks roads, bridges, free or subsidised educational facilities), the market economy often runs into trouble. Social goods are goods which are required for the welfare of society as a whole, but for which the market fails to provide a value.
People are generally ignorant of the value or utility of social goods. An individual knows that once one category of social goods say a road, is constructed, he cannot be denied its use whether he paid for its construction or not.
Everyone assumes that others would pay for it. It is these failures of the market (i.e., provision of social goods) that bring the role of the government and public expenditure in focus for providing social goods for the welfare of the public in general.
Some economists divide social goods under two heads: Social and economic overheads. Social overheads like hospitals, schools and colleges and technical institutions and economic overheads like roads and railways, irrigation and power projects etc. are all essential for economic development. It is the responsibility of Public expenditure to build up sound social and economic overheads as money for these things does not usually come from private sources.
2. Remove unemployment:
Public expenditure is the most potent weapon to fight unemployment. The level of employment depends upon effective demand. The government can influence effective demand either by making more public expenditure or by resorting to such fiscal methods as may raise the level of private expenditure.
The role of public expenditure becomes very significant during the period of depression when the private entrepreneurs are not keen to take up investment activities.
The government can resort to counter cyclical fiscal policy, which means the taxes and government spending be varied in an anti-cyclical direction; government spending being cut and taxes increased in the expanding phase of cycle and government spending increased and taxes cut during the contraction phase. Increased govt, expenditure will open new job opportunities in the country, which means creation of demand of goods and services.
Mention may also be made of pump priming and compensatory expenditure to raise the level of employment in the economy. Pump priming refers to increase in private expenditure through an injection of fresh purchasing power in the form of an increase in public expenditure even through budgetary deficit.
It is argued that such an initial public expenditure may set in motion a process of recovery from the condition of depression. Compensatory expenditure refers to the variation in the government budget expenditure to compensate the deficiency in private demand so as to maintain high level of investment, employment and income stability.
In the words of Keynes, government expenditure becomes a balancing factor in order to maintain national income at a given level. Such expenditure may be progressively raised during depression phase of the business cycle, and progressively reduced in the recovery phase.
3. Increase Production:
Public expenditure contributes to production through a large number of public enterprises both in industries and agriculture. Government incurs a lot of expenditure in the agricultural sector, e.g. on irrigation and power, seed forms, fertilizer factories, warehouses, etc., and in the industrial sector by setting up public enterprises like the steel plants, heavy electrical, heavy engineering, machine-making factories, etc. All these enterprises are calculated to promote production and thereby economic development.
4. Exploitation and Development of Mineral Resources:
Minerals provide a base for further economic development. The government has to undertake schemes of exploitation and development of essential minerals, e.g. coal and oil. Public expenditure has to play its role here too.
5. Promote Price Stability:
Increase in public expenditure relieves the economy from the quagmire of depression and conversely public expenditure can be scaled down when there is a fear of inflationary rise in prices. Thus public expenditure helps in stabilising price.
6. Promote Balanced Growth:
There is a tendency to use economic resources for the further development of already developed regions. But for overall growth, special attention needs to be paid for the development of backward areas and under developed regions. This requires huge amounts for which reliance has to be placed on public expenditure.
7. Reduce Inequality of Income:
Another objective of Public expenditure is to reduce the inequality of income. Expenditure on old age pensions, unemployment relief, free education, free mid-day meals etc. benefits the poorer classes of the community at the expense of the rich.
The above objectives reveal that public expenditure properly made of utmost important for social welfare and economic prosperity.