Bases for Resource Allocation Budgeting Essay

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Budgeting; Allocation of Public Resources

In 1940, V.O. Key laid out the basic budgeting problem that economists are yet to solve: ‘on what basis do we decide to allocate resources to one program and not another given the scarcity of resources?’ According to Keys, solutions to this problem lie in economic theory or an improved understanding of the institutional arrangements within which decisions for resource allocation are made (Fozzard, 2001). From these two perspectives, economists have proposed several guiding principles as the basis for resource allocation in the public sector. This text discusses five of these bases.

The Public Goods Basis

This basis assumes that the market is perfect and that the forces of demand and supply adjust accordingly to allocate public resources in an efficient manner without the need for public intervention (Fozzard, 2001). Public intervention would only be justified in the event of market failure, where the forces of demand and supply would result in an inefficient allocation of resources (Fozzard, 2001). The appropriate response from the public sector in the case of market failure will depend on the degree and type of market failure that the response seeks to correct (Fozzard, 2001).

The Marginal Utility Basis

Classical economists argue that an individual will seek to equalize the marginal utility gained from each unit of spending across the range of consumable goods and services (Premchand, 1989).

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The marginal utility basis argues that the public sector should allocate resources among activities using the same basis. In essence, resources in the public sector are to be distributed among different uses such that the marginal rate of satisfaction for all the uses is the same (Premchand,…

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…to which an intervention redistributes resources is assessed by analyzing the social distribution of the costs (taxation) and benefits (expenditures) of public interventions using benefit incidence analysis. The greatest resources are thus allocated to interventions with the highest distributional impact (Lane, 2000).

In my view, the equity basis is the most appropriate approach for allocating resources in the public sector. The approach is preferred because it considers the social distribution of benefits. In so doing, it provides a more accurate view of what social group benefits or loses from a given policy, and the extent of their gain or loss (Fozzard, 2001). The price of a commodity or intervention measures the private benefit that an individual attaches to the intervention. The price, therefore, does not take into consideration the social benefits of the intervention thereof (Lane, 2000). Thus, prices do….....

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