Question

What is government budget ? Explain how taxes and subsidies can be used to influence allocation of resources.

Answer 1

A Government Budget is a financial statement showing item-wise expected government receipts and government payments during a particular financial year. It also presents the government's report on the financial performance during the previous fiscal year.

Government reallocates the resources through its budgetary policy to meet its social and economic objectives. Private firms do not produce public goods like roads, bridges, parks etc. The government, through allocation of its resources, produces goods for public needs to maximize social welfare. Government can influence allocation of resources through (i) tax concessions, subsidies, etc. and (ii) directly producing goods and services. To encourage investment government can give tax concession, subsidies etc. to the producers. If private sector does not take interest, government can directly undertake the production.