Externalities refer to the harms  (or benefits) a firm or individual causes to another for which they are not penalised (or paid for).Externalities may be positive or negative.For example, increase in GDP may be at the cost o considerable pains and sacrifices in the form of environment pollution.As a result, increases in GDP may mean less economic welfare.If increases in GDP has been brought about by making workers work in bad working conditions,k increase in GDP will not raise the level of economic welfare.

Free play of the market forces are bound to generate trade cycles, also called business cycles.these refer to the phases of recession and depression, recovery and boom in the economy.The government budget plays a significant role in preventing business fluctuations due to inflation or deflation and hence, maintains economic stability.Economic stability stimulates investment, consequently, increasing the rate of growth and development.

The government aims to reallocate resources in a way so that its economic (profit maximisation) and social objectives (public welfare) are fulfilled.The government can influence allocation of resources through implementation of appropriate fiscal policy.Production of goods, which are injurious to health is discouraged through heavy taxation.On the other hand, production of goods which are beneficial for society is encouraged through subsidies.

The objectives of a budget are as follows:
(i) Reallocation of Resources.
(ii) Reducing Inequalities in income and Wealth
(iii) Economic Stability
(iv) Management of Public Enterprises
(v) Economic Growth
(vi) Reducing Regional Disparities.

Revenue Deficit: Revenue deficit is the excess of current revenue expenditure over the current revenue receipts.
Revenue Deficit = Current Revenue Expenditure - Current Revenue Receipts
Current revenue expenditure includes both plan and non-plan expenditure of the government to be met through revenue receipts. Current revenue receipts include the net tax and non-tax revenue receipts of the central government. Until the middle of 1970's, the central government in India enjoyed revenue surplus as the revenue receipts of the central government exceeded the revenue expenditure. The phenomenon of revenue deficit made its appearance during the latter 1970's.
Budgetary Deficit: Budgetary deficit is the excess of total expenditure of the government over its total receipts. Total expenditure includes both revenue expenditure and capital disbursements. Total receipts similarly include both revenue and capital receipts.
Budgetary Deficit = Total Expenditure - Total Receipts
= (Revenue Expenditure + Capital Expenditure) - (Revenue Receipts + Capital Receipts)
It was this concept of budgetary deficit that was understood as deficit financing in India
Fiscal Deficit: Fiscal deficit is the difference between total expenditure of the government and its total revenue receipts and capital receipts excluding the borrowings and other liabilities of the government. Altematively, fiscal deficit is the aggregate of budgetary deficit plus borrowings and other liabilities. Fiscal Deficit can be calculated as below:
Fiscal Deficit = Total Expenditure - Total Revenue Receipts - Capital Receipts excluding borrowings.
Primary Deficit: Primary deficit is the difference between fiscal deficit and interest payments. It is the aggregate of budgetary deficit plus borrowings and other liabilities minus interest payments.
It can be calculated as:
Primary Deficit = Fiscal Deficit - Interest Payments
Alternatively primary deficit can be evaluated as:
Primary Deficit = Budgetary Deficit + Borrowings and Other Liabilities - Interest Payments.
The primary deficit in the central government budget in India was of the magnitude of RS. 19,502 crore in 2000-0 1, which has increased to RS. 31,317 crore in 2001-2002.

The concept of revenue deficit is simple and straight. The revenue deficit is defined as the excess of revenue expenditure over revenue receipts. Mathematically,
Revenue Deficit = Revenue Expenditure - Revenue Receipts
For example, according to the government of India, Budget for the year 2005-2006 states:
Total Revenue Receipts = RS. 3,09,322 crores
Total Revenue Expenditure = RS. 3,85,493 crores
Revenue Deficit = RS. 3,85,493 - RS. 3,09,322 = RS. 76,171 crores
In other words, there should be revenue surplus, which should be used for building projects or building assets which yield return. In fact, revenue surplus represents government savings,which can be used for financing development.
Revenue deficit represents a critical situation in the economy. Revenue deficit indicates the amount of current expenditure which cannot be met by revenue receipts. It implies that government is spending beyond its means. The government should either increase its tax/non-tax receipts or should cut its expenditure. In poor countries, in the initial stages of economic development, often the situation arises when the government has to incur large expenditure on administration and maintenance (particularly on defence, police and law and order) but it is difficult to compel the poor people to pay high taxes. In such situations, the government meets its revenue deficit either through borrowing or through disinvestment. Borrowing by the government, on the other hand, creates the problem of repayment of debt. Disinvestment reduces the asset of the government.

Importance of public expenditure has been increased due to the following reasons:
(i) Increase in the Activities of the State: In the modern age, the activities of the state have been increased many times. There has been an extensive and intensive increase in the activities of central, state and local governments. Nowadays, governments undertake various activities such as to run, encourage and regularise the economic activities, to maintain economic stability, to secure poor and backward classes and to increase the rate of economic development, etc. There is a great importance of public expenditure in the completion of these activities.
(ii) Economic Planning: Developing countries like India has adopted the path of economic planning for the removal of problems like poverty, unemployment and for the development of the country. As a result, the government has to incur expenditure on large scale. There is a great importance of public expenditure in economic planning.
(iii) Removing Unemployment. Poverty and Income Inequalities: Public expenditure has a great importance for the reduction of chronic problems like unemployment, poverty and income inequalities.

A tax is a compulsory payment to the government by the public. A tax payer does not get any direct service in return for the payment.
Types of Taxes
Taxes imposed by the government are of the following types:
(i) Single and Multiple Tax
(ii) Progressive and Regressive
(iii) Value Added and Specific Tax
(iv) Direct and Indirect Tax
Single and Multiple Tax
(a) Single Tax: It refers to a system in which the taxes are levied only on one item. It implies a tax on one commodity, i.e., one class of goods or one class of people.
(b) Multiple Tax: It implies that there should be many types of taxes so that every citizen can contribute to government revenue. Multiple tax system is generally preferred to the other tax system.
Progressive and Regressive Tax
(a) Progressive Tax: A progressive tax is the one in which tax increases with an increase in the level of income of the tax payer. Higher the income higher will be the rate of taxation and vice-versa.
(b) Regressive Tax: Regressive tax system is the one in which the tax rate decreases with an increase in the level of income of tax payer. Higher the level of income lower will be the rate of tax and vice-versa.
Value Added and Specific Tax
(a) Value Added Tax or Ad valorem Tax: The tax which is imposed on price of the commodity is known as Value Added Tax (VAT) or Ad valorem Tax.
(b) Specific Tax: The tax which is imposed on the commodity according to its weight, size or volume is known as specific tax.
Direct and Indirect Tax
(a) Direct Tax: Direct tax is a tax levied on the property and the income of persons. These are paid directly to the state by the consumers. Its burden cannot be shifted by the tax payer on someone else. For example: Income tax.
(b) Indirect Tax: Indirect tax is a tax collected by an intermediary (seller) from the person who bears the ultimate economic burden of the tax (buyer). For example: Excise duty.