Question

Describe the allocation function and re-distribution function of a government budget.

Hint:

Remember the core purpose of each function: \begin{itemize} \item Allocation = Correcting market failure (providing public goods). \item Redistribution = Correcting inequality (making income distribution fairer). \end{itemize}

Answer 1

The government budget is a powerful tool for achieving key economic and social objectives. Two of its primary functions are the allocation function and the redistribution function.
1. Allocation Function:
The allocation function refers to the government's role in influencing the allocation of resources in the economy. The market mechanism is generally efficient at allocating resources for private goods, but it fails in the case of public goods. \begin{itemize} \item Provision of Public Goods: Public goods are goods that are non-rivalrous (one person's consumption doesn't reduce its availability to others) and non-excludable (it's impossible to prevent anyone from consuming it). Examples include national defense, law and order, and public parks. Private firms have no incentive to provide these goods because they cannot charge a price for them (the free-rider problem). \item Budgetary Role: The government, through its budget, allocates resources for the provision of these essential public goods. It does this by collecting revenue through taxes and incurring expenditure on these goods and services. \item Correcting Externalities: The budget is also used to encourage activities with positive externalities (e.g., subsidies for education) and discourage those with negative externalities (e.g., taxes on pollution). \end{itemize} 2. Redistribution Function:
The redistribution function aims to modify the distribution of income and wealth in society to ensure social justice and equity. The market-based distribution of income is often highly unequal. \begin{itemize} \item Objective: To reduce the gap between the rich and the poor and to provide a minimum standard of living for all citizens. \item Budgetary Tools: The government uses two main budgetary tools to achieve this: \begin{enumerate} \item Taxation Policy: The government imposes a **progressive tax structure**, where the tax rate increases with income. This means higher earners pay a larger proportion of their income in taxes compared to lower earners. \item Expenditure Policy (Transfers and Subsidies): The revenue collected from taxes is used to fund social security programs, transfer payments (like pensions, unemployment benefits), and provide subsidies on essential goods and services (like food, healthcare, and education) for the poorer sections of society. \end{enumerate} \end{itemize} Through these measures, the government takes purchasing power from the higher-income groups and transfers it to the lower-income groups, thereby making the final distribution of income more equitable.