Allocation function
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"
Meaning
The allocation function is the budget's job of supplying goods and services that the market cannot supply through normal buying and selling. Examples are national defence, roads and government administration. The market fails here mainly because of public goods. These are non-rival, which means one person's use does not reduce what others get. They are also non-excludable, which means people who do not pay cannot be kept out. So people become free riders: they enjoy the good and expect others to pay for it. Private firms then cannot recover their costs, so the government steps in and pays for these goods from the budget.
Example
No private company can sell "national defence" to each household separately, because an army protects everyone, paying or not. So the Union Budget pays for it. Defence was 1.0% of GDP on the revenue side in 2023-24 (NCERT Table 5.1).
Don't confuse with
- Redistribution function: this function changes who gets how much income through taxes and transfers. The allocation function decides which goods get supplied at all.
- Stabilisation function: this function manages aggregate demand to smooth booms and slumps. It is not about supplying particular goods.
Related concepts
- Redistribution function
- Stabilisation function
- Public goods
- Private goods
- Non-rivalry
- Non-excludability
- Free-rider problem
- Club goods
- Merit goods
- Demerit goods