The correct option is 1 only
Explanation
The government budget performs three primary functions: the Allocation Function, the Distribution Function, and the Stabilization Function. The Allocation Function specifically relates to the provision of public goods and services that the market mechanism fails to provide efficiently due to market failures.
Statement 1 is Correct:
The allocation function of the budget aims to provide public goods (such as national defence, law and order, and street lighting). The market mechanism typically fails to provide these goods because there is no direct link between payment and consumption, making it unprofitable for private entities to produce them.
Statement 2 is Incorrect:
Public goods are characterized by being non-rivalrous and non-excludable.
- Non-rivalrous: One person’s consumption of the good does not reduce its availability for others (e.g., breathing air or enjoying a public park).
- Non-excludable: It is difficult or impossible to prevent non-payers from using the good.
Statement 3 is Incorrect:
The "free-rider" problem arises precisely because public goods are non-excludable; individuals can benefit from the good without paying for it. This problem is not easily solved by charging a user fee, because it is technically or economically unfeasible to exclude non-payers. Consequently, these goods must usually be financed through general taxation rather than direct user charges.
Key Takeaway:
Public Goods are defined by non-rivalry and non-excludability. The Allocation Function of the budget exists to ensure these goods are provided, as the market cannot address the free-rider problem effectively.