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Public finance - Essay Example

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The growth of an economy and the prosperity and welfare of its citizens depend upon the existence of an efficient public sector and a tax system which is designed to yield the needed revenues in an equitable fashion. This can be fully explained by understanding efficiency and…
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Download file to see previous pages ng maximum output from its resources, whereas, parreto efficiency occurs where it is impossible to make one better off without making at least one worse off.
The efficiency in the public sector is distorted by market failures. Market failures are those situations where conditions necessary to achieve the market efficient solution fail to exist or are repudiated somehow. Some the examples of market failures include the existence of public goods and externalities, imperfect competition, incomplete information, uncertainty and many more. When market fails in the public sector, inefficiencies are at its peak and intervention from a vast external force is much needed, this is the part where government intervenes in the market. The intervention of the government involves the four branches known as the Musgrave’s 4 branches which are; allocation branch, distributional branch, stabilization branch and regulatory branch.
First, the allocation branch is activated when one of the following four principles are violated; a lucid system of property rights, complete information to buyers and sellers, excludable principle and rivalry in consumption. So for commodities where property rights cannot be assigned to a single individual, these common property resources fail the market due to the problem called tragedy of the commons, as these goods are for free and individuals’ tend to over use them. This over usage of the goods would mean rapid deterioration of the goods and that less of the goods would be available to others. This is a violation of the principle of having a clear system of property rights. The allocation branch corrects this inefficiency by communally owning the property rights rather than rights being privately owned and this means for each resource government allocates the right to use that resource.
In addition, inefficiency also arises from pure public goods that are non-excludable and non-rival in consumption. In the case of non-excludable you cannot ...Download file to see next pagesRead More
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