Question

Explain the following: 

Optimum allocation of resources as an objective of fiscal policy

Answer 1

One of the primary goals of fiscal policy in an economy is the optimal distribution of resources. Misallocation, misuse, and poor use of resources cause it to become a major issue. As a result, fiscal policies like taxes and public spending plans have a big impact on how resources are distributed among different industries. The government can use fiscal policy to allocate funds for the construction of social infrastructure in order to stabilise the economy. Subsidies and incentives for public spending can positively affect how resources are distributed in the intended channels. Tax exemptions and concessions can be quite helpful in drawing resources to the industries that are preferred.

Market mechanisms don’t always result in economic efficiency. This occurs as a result of external factors or production diseconomies brought on by market oligopoly and monopolistic tactics. Take social goods, for instance. They are consumed collectively or separately by society. However, we cannot make people pay for the usage of such things. Therefore, fiscal policy can safely address such external economy and diseconomy issues. Stated differently, fiscal policy promotes investment in productive avenues that are deemed both economically and socially beneficial. As a result, efficient resource allocation prevents unnecessary and ineffective investment and fosters economic growth.