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What is the role of public finance in economic development?

Question:

What is the role of public finance in economic development?

Economic Development:

Economic development means a rise in the living standard of the people. It focuses on increasing income as well as the quality of life. Economic development is measured through gross domestic product and market productivity.

Answer and Explanation:

Regional growth: The government focuses attention on having balanced growth in all regions. It focuses on investing in backward areas so that their condition can be improved. It requires a considerable amount of funds, which is possible only through government expenditure. Therefore, public finance leads to economic development.

Subsidies and grants: The government provides subsidies and grants to individuals to increase their expenditure. When the government provides a subsidy, the individuals can purchase goods at a lower price through which their living standard increases.

Allocation of resources: Public finance helps in the proper allocation of natural and human resources. The government charges high taxes on luxurious goods and charge a low rate of taxes on necessary goods to increase its consumption.

Infrastructural development: The government collects revenues in the form of taxes from people and spends on public infrastructure. It builds new roads, buildings, flyovers, etc. It helps in developing the economy.

Equal distribution: If there is a large difference between the incomes of people, government charge high taxes on income of richer people and spend it on the welfare of poor people. The government spends money in the form of subsidies and allowances on poor people, which helps in developing the economy.


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What is Economic Development? - Definition & Examples

from MTTC Economics (007): Practice & Study Guide

Chapter 29 / Lesson 5
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