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Private Finance and Public Finance: What is the Difference?

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public finance and private finance illustration

What is private finance? 

Private finance is the finance of private entities. These private entities may be businesses, firms, or individuals.

Private finance focuses on how people handle their personal finances. 

What is public finance? 

Public finance is about how government funds are handled in a way that is most beneficial to the development of a country both locally and internationally.

It basically refers to the government’s responsibility to manage public funds and successfully improve a nation’s economy.

Examples of public finance and private finance 

Public finance includes stakeholders like the government and public sectors that involve tax, public revenue, public debt, fiscal policy, etc. 

Private finance, on the other hand, involves consumer loans, savings accounts, insurance policies, and stock market investments, among others.

Difference between public finance and private finance

PublicPrivate
1.The government determines its budget and expenditure first before they find the means to raise funds.Expenditure is adjusted according to the source of income. Hence, expenses are determined by income.
2.In times of financial difficulties, the government has several sources of income and revenue they can borrow from e,g, internal and external loans from local and foreign countries 
Compared to public entities, the private individual has limited sources to borrow from.
3.Public entities operate on annual budgets.
Private depends on income and salary in the form of daily, weekly, or monthly wages.
4.Public entities depend on the government and the type of budget they want to work with; surplus or deficit budget. 
With private entities, a surplus budget is preferred because they can’t survive with a deficit budget. 
5.The public collects taxes from private entities.Private entities pay taxes to the public. 
6.Public entities may have financial difficulties but would not go bankrupt due to the multiple sources of incomePrivate entities can likely go bankrupt even when they try to increase their sources of income.

What are the similarities between public finance and private finance?

  • Both public and private finance involve expenditure, borrowing, and income.
  • Both aspects of finance focus on personal or societal satisfaction. The individual as a private entity aims to satisfy himself, but the government uses public finances to meet society’s needs.
  • Sometimes, both private and public stakeholders depend on borrowing to get by in situations where expenses are bigger than income. 
  • Both public and private organizations and people occasionally adopt sound and flawed financial practices.

Bottom line

Public finance involves distributing financial resources to achieve public affairs objectives, and private finance refers to a person’s financial activity. Both broadly share the same objectives, i.e., the satisfaction of human wants. 

In private finance, a person’s or a company’s budget typically isn’t subject to as much monitoring or needs to be approved by a higher authority. Whereas, in public finance, the budget of government needs to be reviewed and approved by the legislature.

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