Distinction between Private and Public Finance

 Public finance is the study of income, expenditure, borrowing and financial administration of the Government.

On the other hand, Private Finance is the study of  income, expenditure, borrowing and financial administration of individuals or private companies.

There are, therefore, no fundamental differences between Public Finance and Private Finance. However, there are certain basic differences between the two. 

                                                  

                                                                SIMILARITIES

The following are the similarities between public and private finance.

1) Objective:- Both the State as well as individual aim at the satisfaction of human wants through their financial operations. The individuals spend their income to satisfy their personal wants whereas the state spends for the satisfaction of communal or social wants.

2) Principles:- For both kinds of finances, the guiding principle is rationality. Rationality is in the sense that maximization of personal benefits and social benefits through corresponding expenditure.

3) Income, Expenditure and Borrowing:- Both Public Finance and Private Finance have income and expenditure. The ultimate aim of both is to balance their income and expenditure.Both the States and Individual at times have to depend on borrowing, when their expenditures are greater than incomes.

4) Policies:- Both follow rational or irrational policies. If Government follows rational financial policies , it maximises social welfare. Similarly, an individual maximises his welfare. The opposite happens in the case of irrational policies.

5) Administration:- Both require efficient administration for their success. If the administration is inefficient or corrupt, both face wastage and loss.


                                                   DISSIMILARITIES

The following are the main point of dissimilarities between public and private finance:-

1) Adjustment between Income and Expenditure:- The private individual has to adjust his expenditure to his income. i.e., his expenditure is being determined by his income. But on the other hand the government first determines its expenditure and then the ways and means to raise the necessary revenue to meet the expenditure.

2) Elasticity:-  The government has large sources of revenue than private individuals. Thus at the time of financial difficulties the state can raise internal loans from its citizens as well as external loans from foreign countries. In the case of private individual, all borrowings are external in nature.

3) Print notes:- The state, when hard pressed, can resort to printing of currency, as an additional source of revenue. In fact, during emergencies like war, it meets its increased financial obligations by printing new currency. But an individual cannot raise income by creating money.

4) Budgeting:- The state prepares its budget or estimates its income and expenditure annually. But there is no such limitation for an individual. It may be for weekly, monthly, or annually.

5) Motives:- The individual and state also differ in their motives regarding expenditure. The individuals hanker after profit. Their business operations are guided by private profit motive. But the states expenditure is guided by the welfare motive.

6) Expenditure:- The pattern of expenditure in the case of private finance is often influence by customs, habits social status etc. The pattern of government expenditures is guided by the general economic policy followed by the government

7) Secrecy Vs. Openness:- Private Finance is always a secret affair. Individual need not reveal their financial transactions to anyone except for filing tax returns. But Public Finance is an open affair. Government budget is widely discussed in the parliament and out sides. Public accountability is an important feature of public finance.

8) Bankrupt:- An individual or firm can be bankrupt. But a Government cannot go bankrupt because3 it can borrow from international agencies. It can only face financial crisis.

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