Detailed Analysis Of Theory In Public Expenditure

B. Detailed analysis of theory In Public Expenditure, benefits-received principle is applied wherein misallocation of resources are corrected in government expenditures within a competitive market. The average cost pricing may be accepted if it can help reduce efficiency losses like marginal cost pricing. In average cost pricing wherein operating the service is at break-even output, the main consideration is providing the service than not at all. This is especially true among public utilities that are necessary to provide for basic services like electricity and water. At any instance, it may even come to a point that a Public Sector firm cannot make it to the break-even due to the limited number of users it gets. Nevertheless, the

Other than this, firms with monopolistic features have the tendency to produce low quality output because of absence of competition. Existence of natural monopolies cannot be avoided because of the high cost of some products/services needed for the market such as utilities, natural gas and electric companies. In order to avoid this continuous problem of abuse, the government may intervene to control monopolistic firms. The government can set price ceilings to important commodities or utilities like electricity. This is true with government-owned corporations wherein the price ceiling will equal to the average total cost earning only a normal profit (Welker,

Firms with natural monopolies exist because of the large start-up capital that these firms have. Firms take advantage of this including government subsidised organisations and public sectors. Government has to take its stand to protect a large number of consumers and to control price hikes. Some of government regulations that are important to avoid abuse of monopolistic power are placing price ceilings and drafting policies for monopolistic firms to follow. Thus, government intervention can greatly help in favouring both the consumers and the monopolistic firms through good laws and policies.Another issue to be considered is the determination of other factors that may affect the decision of the government to allow monopoly in its state or to open up for private firms and avoid monopoly. Another issue is to determine options that the government can choose to regulate natural monopolies. Another way is through setting conditions on regulated monopolies so that any untoward and abusive transactions can be prevented at an early stage. And lastly, the government can open up the market by anti-monopoly laws and practices that can enhance investments.