Private Investment and Public Investment

Investment can be divided into two factions on the basis of ownership of investment viz. Private Investment and Public Investment.

Private Investment

Private Investment is the investment which is made by the private individuals with the sole objective of earning profit. According to classical economist Keynes, there are two factors which decide the Private Investment viz. Marginal Efficiency of Capital (MEC) and Rate of Investment. It can be simply understood by the fact that the output in an economy depends upon the stock of capital. If there is an increase in stock of capital, the output increases. But, how much increase in investment in capital would raise the output, this would depend upon the productivity of new capital i.e. on the marginal efficiency of capital. The marginal efficiency of capital (MEC) is that rate of discount which would equate the price of a fixed capital asset with its present discounted value of expected income.

A businessman while investing in a new capital asset examines the expected profit on it during its lifetime against the supply price of capital asset (interest). If the Marginal Efficiency of Capital (MEC) is greater than the rate of interest, more private investment will be made.

Public Investment

Public Investment is that investment which is made by the central, provincial or local self government of a country. This investment is made for social welfare, defense and economic development. Profit does not motivate such investment.