The public sector is the part of the economy controlled by governments that provides services like the military, police, public transit, education, and healthcare. It aims to provide services that benefit all of society. Public sector economics studies how governments can address market failures through public spending, taxation, state ownership of firms, and regulation. It analyzes how governments can improve economic welfare and quality of life.

1. 1
Public Sector
Economics

2. PUBLIC SECTOR
The PUBLIC SECTOR is the part of the economy
concerned with providing various government services. The
composition of the public sector varies by country, but in most
countries the public sector includes such services as the
military, police, public transit and care of public roads,
public education, along with health care and those working for
the government itself, such as elected officials. The public
sector might provide services that a non-payer cannot be
excluded from (such as street lighting), services which benefit
all of society rather than just the individual who uses the
service.
The public sector is that portion of an economic system that is
controlled by national, state or provincial, and local
governments.

3. PUBLIC SECTOR ECONOMICS
Public sector economics is an area of study that is directly relevant to our everyday
lives. It affects the taxes we pay, the buses and trains on which we travel, the
workers who empty our bins, the gas and electricity delivered to our homes, and even
the water coming out of our taps!
Public sector economics is concerned with justifying the existence of governments
and explaining how they can affect economic activity. It explains how the ‘invisible
hand' of the market is tempered by the ‘visible hand' of government in the mixed
economy of both private and public sectors adopted by the vast majority of nations.
Traditionally, public-sector economics has been concerned with the study of how
governments can deal with the failure of markets to achieve efficient outcomes.
Possible remedies which are considered include using public expenditure and
taxation, taking some firms into state ownership and introducing regulation. These
are all areas of microeconomic theory, policy and practice.

4. PUBLIC SECTOR ECONOMICS WELFARE
Welfare (n): The health, happiness, and fortunes of a person or group
A branch of Economics that focuses on the optimal allocation of resources and goods and how this
affects social welfare. Welfare economics analyzes the total good or welfare that is achieved at a
current state as well as how it is distributed. This relate to the activity of income distribution and
how it affects the common good.
Definition of economic welfare: The level of prosperity and quality of living standards in an
economy. Economic can be measured through a variety of factors such as GDP and other indicators
which reflect welfare of the population (such as literacy, number of doctors, levels of pollution
e.t.c)
Economic welfare is a general concept which doesn’t lend to easy definition. Basically, it refers to
how well people are doing. Economic welfare is usually measured in terms of Real Income, real
GDP. An increase in Real Output and real incomes suggests people are better off and therefore
there is an increase in economic welfare.
However, economic welfare will be concerned with more than just levels of income. For example,
people’s living standards are also influenced by factors such as levels of congestion and pollution.
These quality of life factors are important in determining economic welfare.

5. EXTERNALITIES
•
Externalities are benefits (costs) received (borne) by neither the seller
or the buyer but by third parties.
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Private benefits + external benefits = social benefits
•
Private costs + external costs = social costs
•
Since external benefits and costs are not perceived by buyers and
sellers they are not captured in markets.
•
Therefore, markets may fail to allocate resources inefficiently.Concept of Externalities: Externalities occur when any activity by an
individual or organization or any project activity affect other persons (or
society) well-being and the relevant costs and benefits are not reflected
in market prices
In Economics, an externality is the cost or benefits that affects a party who did not
choose to incur that cost or benefits.
Externalities are a loss or gain in the welfare of one party resulting from an activity of another
party, without there being any compensation for the losing party.

6. POSITIVE EXTERNALITIES
A positive Externality arises say when any project or activity (say building a bridge) creates a positive benefit
for the immediate society. Thus a positive externality would increase the utility of third parties at no cost to
them. For example:
Govt Programmes : NREGA, Sarva Sikhshya Abhiyan, Bharat Nirman, Mid day meals schemes
Millennium Development Goals by the United Nations (started in 2000)
Infrastructure Initiatives : Building a bridge or road
A positive externality would increase the utility of third parties at no cost to them

7. NEGATIVE EXTERNALITIES
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Marginal social costs are greater than marginal private costs.
•
Pollution is a cost that may not be borne by sellers, but it is a cost
nonetheless to society.
•
Private markets will overproduce (devote too many resources) to
the production of goods with negative externalities.
•
Damage to environment and Scarce resources etc
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Water pollution by industries that adds effluent, which harms
plants, animals and humans.
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Noise pollution which may be mentally and psychologically
disruptive.

8. ENCOURAGING POSITIVE
EXTERNALITIES
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Increasing supply: Govt grants and subsidies to producers of goods and
services that generate external benefits will reduce costs of production
and encourage more supply.
•
Increasing Demand: Demand for goods, which generates positive
externalities, can be encouraged by reducing the price paid by
consumers. For example subsidizing the tuition fees of university students
will encourage more young people to go to university, which will
generate a positive externality for future generations.

9. LABOUR MARKET
•
The nominal market in which workers find paying work, employers find
willing workers, and wage rates are determined.
•
Labor markets may be local or national (even international) in
their scope and are made up of smaller, interacting labor markets for
different qualifications, skills, and geographical locations. They depend
on exchange of information between employers and job seekers about wage
rates, conditions of employment, level of competition, and job location.

10. LABOR MARKET in India

11. LABOR MARKET in India

18. MONETARY INSTITUTIONS
Definition: The monetary system represents the totality of laws and decisions adopted by national authorities
which aim to secure the proper functioning of money by regulating the circulation of money.
Components of Financial System
A financial system refers to a system which enables the transfer of money between investors and
borrowers. A financial system could be defined at an international, regional or organization level.
The term “system” in “Financial System” indicates a group of complex and closely linked
institutions, agents, procedures, markets, transactions, claims and liabilities within a economy.
Five Basic Components of Financial System
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Financial Institutions
•
Financial Markets
•
Financial Instruments (Assets or Securities)
•
Financial Services
•
Money

20. Financial Institutions
Financial institutions facilitate smooth working of the financial system by making investors and borrowers
meet. They mobilize the savings of investors either directly or indirectly via financial markets, by making
use of different financial instruments as well as in the process using the services of numerous financial
services providers. They could be categorized into Regulatory, Intermediaries, Non-intermediaries and
Others. They offer services to organizations looking for advises on different problems including
restructuring to diversification strategies. They offer complete array of services to the organizations who
want to raise funds from the markets and take care of financial assets for example deposits, securities,
loans, etc.
Financial Markets
A financial market is the place where financial assets are created or
transferred. It can be broadly categorized into money markets and
capital markets. Money market handles short-term financial assets
(less than a year) whereas capital markets take care of those
financial assets that have maturity period of more than a year. The
key functions are:
1. Assist in creation and allocation of credit and liquidity.
2. Serve as intermediaries for mobilization of savings.
3. Help achieve balanced economic growth.
4. Offer financial convenience.

21. Financial Instruments
This is an important component of financial system. The products which are traded in a financial market are
financial assets, securities or other type of financial instruments. There is a wide range of securities in the
markets since the needs of investors and credit seekers are different. They indicate a claim on the
settlement of principal down the road or payment of a regular amount by means of interest or
dividend. Equity shares, debentures, bonds, etc are some examples.
Financial Services
Financial services consist of services provided by Asset Management and Liability Management
Companies. They help to get the necessary funds and also make sure that they are efficiently deployed.
They assist to determine the financing combination and extend their professional services upto the stage of
servicing of lenders. They help with borrowing, selling and purchasing securities, lending and investing,
making and allowing payments and settlements and taking care of risk exposures in financial
markets. These range from the leasing companies, mutual fund houses, merchant bankers, portfolio
managers, bill discounting and acceptance houses. The financial services sector offers a number of
professional services like credit rating, venture capital financing, mutual funds, merchant banking, depository
services, book building, etc. Financial institutions and financial markets help in the working of the financial
system by means of financial instruments. To be able to carry out the jobs given, they need several services
of financial nature. Therefore, Financial services are considered as the 4th major component of the financial
system.

22. Money
Money is understood to be anything that is accepted for payment of products and services
or for the repayment of debt. It is a medium of exchange and acts as a store of value.
•
DEFINITION OF 'FINANCIAL SYSTEM A financial system
can be defined at the global, regional or firm specific
level. The firm's financial system is the set of
implemented procedures that track the financial
activities of the company. On a regional scale, the
financial system is the system that enables lenders and
borrowers to exchange funds. The global financial
system is basically a broader regional system that
encompasses all financial institutions, borrowers and
lenders within the global economy.

23. Important Functions Performed by Central Banks (6 Functions)
1.Itissuesthecurrencynotesofthecountry.
2.Itisthecustodianoftheforeignexchangereservesofthecountry.[Foreign-exchangereserves(alsocalledforexreservesorFXreserves)areassetsheldbyacentralbankorothermonetaryauthority,
usuallyinvariousreservecurrencies,mostlytheUnitedStatesdollar,andtoalesserextenttheeuro,thepoundsterling,andtheJapaneseyen,andusedtobackitsliabilities]
3.Itservesasbankertothegovernment.
4.Itservesasbankertocommercialbanks.
5.Beingamonetaryauthority,itregulatesthebanks’creditcreationactivityandperformsthefunctionofacontrollerofcredit.
6.Itpromotestheeconomicdevelopmentofthecountry.
A central bank, reserve bank, or monetary authority is an
institution that manages a state's currency, money supply,
and interest rates.

24. Functions of Commercial Banks
A commercial bank is authorized to serve the following functions:
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Receive deposits - take money in from individuals and businesses (called depositors)
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Disburse payments - make payments upon the direction of its depositors, such as honoring a check
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Collections - a bank will act as your agent to collect funds from another bank payable to you, such as
when someone pays you by check drawn on an account from a different bank
•
Invest funds in securities for a return
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Safeguard money - banks are considered a safe place to store your wealth
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Maintain and service savings and checking accounts of its depositors
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Maintain custodial accounts - accounts controlled by one person but for the benefit of another person,
such as a trust account
A commercial bank is a financial institution that is authorized by
law to receive money from businesses and individuals and lend
money to them. Commercial banks are open to the public and
serve individuals, institutions, and businesses. A commercial bank
is almost certainly the type of bank you think of when you think
about a bank because it is the type of bank that most people
regularly use.

25. Capital markets are financial markets for the buying and selling of long-
term debt or equity-backed securities. These markets channel the wealth of
savers to those who can put it to long-term productive use, such as
companies or governments making long-term investments. Capital markets
are defined as markets in which money is provided for periods longer than a
year. It is the part of a financial system concerned with raising capital by
dealing in shares, bonds, and other long-term investments.
CAPITAL MARKET

26. DEBT
MARKETSBasics of Debt Market
What is the Debt Market?
It is a market meant for trading (i.e. buying or selling) fixed income instruments. Fixed income instruments could be
securities issued by Central and State Governments, Municipal Corporations, Govt. Bodies or by private entities like
financial institutions, banks, corporates, etc.
What is bonds/debt?
Simply put, a bond/debt can be defined as a loan for which an investor is the lender. The issuer of the bond pays the
investor interest (at a predetermined rate and schedule) in return for the funding.
The maturity date refers to the date on which the issuer has to repay the principal to the investor.
The bond market (also debt market or credit market) is a financial market where participants can issue
new debt, known as the primary market, or buy and sell debt securities, known as the secondary market.
This is usually in the form of bonds, but it may include notes, bills, and so on.
The debt market is the market where debt instruments are traded. Debt instruments are
assets that require a fixed payment to the holder, usually with interest. Examples of
debt instruments include bonds (government or corporate) and mortgages.

27. SOME BASIC DEFINITION
In accounting and finance, equity is the difference between the value of the assets/interest and the cost
of the liabilities of something owned. For example, if someone owns a car worth $15,000 but owes $5,000
on that car, the car represents $10,000 equity. Equity can be negative if liability exceeds assets.
DEFINITION OF 'LIABILITY‘ (Responsibility, future sacrifices of economy
A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled
over time through the transfer of economic benefits including money, goods or services.
DEFINITION OF 'LIQUIDITY'
Liquidity describes the degree to which an asset or security can be quickly bought or
sold in the market without affecting the asset's price.
Market liquidity refers to the extent to which a market, such as a country's stock market
or a city's real estate market, allows assets to be bought and sold at stable prices. Cash
is the most liquid asset, while real estate, fine art and collectibles are all relatively
illiquid.

28. Monetary and Fiscal Policy Tools
Imagine that Sam is sick. He's at home right now, and the doctor's been called. All of a sudden, the
doorbell rings, and standing at the front door is a doctor carrying a medical kit. Now, the doctor comes in
the patient's bedroom, opens up the kit and finds three tools inside. I'll bet you're curious about what's in
the kit, huh? The doctor chooses one or two of the tools in his toolkit and uses them on the patient.
Now imagine the patient is the whole economy. The economy has entered a slowdown that has now
turned into a full-blown recession. Unemployment is high, and people are fearful of their financial future.
The government uses its own fiscal policy toolkit, like a doctor, to administer fiscal policy tools - like
government spending, taxes and transfer payments - to help strengthen aggregate demand when it's
weak. On the other hand, when the economy is overheating by growing beyond its capacity, fiscal policy
does the opposite and slows down economic growth to address the problem of inflation.
Now, the word 'fiscal' means 'budget' and refers to the government's budget.
Fiscal policy, therefore, is the use of government spending, taxation and
transfer payments to influence aggregate demand and, therefore, real GDP. If
you imagine the government as the doctor carrying the medical kit, these three
things are in the toolkit: government spending, taxes and transfer payments.
Let's briefly look at some examples of each one of these fiscal policy tools.

29. Fiscal Policy tool Impact on Economy
GOVERNMENT SPENDING
Government spending includes the purchase of goods and services - for
example, a fleet of new cars for government employees or missiles for
national defense. Government spending is a fiscal policy tool because it
has the power to raise or lower real GDP. By adjusting government
spending, the government can influence economic output.
In addition to the primary effect of government spending on the
economy, this spending multiplies through the economy as it affects
businesses who sell the goods and services bought by the government.
Consumers then go on to spend the paychecks they earn from those
businesses, stimulating real GDP even more.
For example, when Larry's Limos receives a large order for more
government vehicles, his sales increase, and he hires more employees
who earn a paycheck from the company. Once they cash their
paycheck, they spend this money on goods and services, and the effect
of a single increase in government spending now leads to a much
greater result - an effect that economists call the multiplier effect.

30. TAXES
Alright, let's talk about taxes. Taxes are a fiscal policy tool because changes in taxes affect the
average consumer's income, and changes in consumption lead to changes in real GDP. So, by
adjusting taxes, the government can influence economic output. Taxes can be changed in several
ways. Firstly, marginal tax rates can be raised or lowered. Secondly, they can be eliminated
entirely, or the tax rules can be modified.
TRANSFER PAYMENTS
Alright. We've talked about government spending, then we talked about taxes - now let's talk about
transfer payments. Transfer payments include things like Social Security, welfare or unemployment
checks. These checks go out all over the country on a monthly basis and serve as the income for
tens of millions of consumers. Transfer payments are fiscal policy tools in the same way that taxes
are because changes in transfer payments lead to changes in consumer income, and when
consumers spend more of their income, this influences economic output.
So, these are the three main tools that the government administers to the economy to help it in the
short-term.

31. PHILLIPS CURVE
An economic concept developed by A. W. Phillips stating that inflation and
unemployment have a stable and inverse relationship. According to the Phillips curve,
the lower an economy's rate of unemployment, the more rapidly wages paid to labor
increase in that economy.

32. Explaining the Phillips curve
The curve suggested that changes in the level of unemployment have a direct and
predictable effect on the level of price inflation. The accepted explanation during the
1960’s was that a fiscal stimulus, and increase in AD, would trigger the following
sequence of responses:
I) An increase in the demand for labour as government spending generates growth.
ii) The pool of unemployed will fall.
Iii) Firms must compete for fewer workers by raising nominal wages.
iv) Workers have greater bargaining power to seek out increases in nominal wages.
v) Wage costs will rise.
vi) Faced with rising wage costs, firms pass on these cost increases in higher prices.