Principle of Maximum Social Advantage – Public Finance

Financial activities of the government have a significant impact on the production, consumption, distribution and income pattern of a country. The Principle of Maximum Social Advantage is the principle that governs the operation of public finance (financial activities of the government) to maximize the economic welfare of the society as a whole.

According to Hugh Dalton – The best system of Public Finance is that which secures the maximum social advantage from its fiscal operations. He propounded the Principle of Maximum Social Advantage and stated the following:

• Government should collect money and spend it to maximize the welfare of people
• When taxes are imposed, dis-utility is created and when expenditure is done, utility is created.
• Government must adjust its revenues & expenditures in such a way that the surplus of utility is maximum and dis-utility is minimum.

Assumptions of Principle of Maximum Social Advantage

• All taxes result in sacrifice. All public expenditure lead to benefit.
• Public revenue consists of only taxes and government has no other source of income.
• Government has no deficit or surplus budget
• Public expenditure is subjected to law of diminishing marginal utility therefore Marginal Social Benefit keeps on diminishing.
• Taxes are subjected to increase Marginal Social Sacrifice.

 

Principle of Maximum Social Advantage

Dalton stated the extent to which public expenditure should be done and taxes should be collected. According to Dalton, public expenditure should be done till the point where the advantage of a unit increase public expenditure to the society is counter balanced by the disadvantage of a unit increase in revenue or taxation.

With every additional unit of tax raised by the public, the burden of tax keeps on increasing while the quantum of benefits keep on decreasing. Hence public expenditure should be carried out till the point of maximum social advantage.

He gave the following two concepts:

MSS – Marginal Social Sacrifice – It is the amount of sacrifice undergone by public (tax payer) due to imposition of one additional unit of tax.

MSB – Marginal Social Benefit – Benefits enjoyed by the public by one additional unit of public expenditure.

Point of Maximum Social Advantage

The point of maximum social advantage is the point where Marginal Social Sacrifice cuts the Marginal Social Benefit curve. This is the optimum limit of State’s Public Finance activity.

It is the point at which the marginal utility from public expenditure equals marginal dis-utility due to taxation. Hence, at this point the benefit derived from the last unit of money spent on public expenditure equals the sacrifice imposed in raising that one addition unit of revenue from the public.

On the basis of the Principle of Maximum Social Advantage

• The resources of the government must be distributed using the Equi-marginal principle i.e. marginal return of satisfaction must be same for all.
• Taxation must be done on the basis of principle of least aggregate sacrifice i.e. the marginal utility of money paid in taxation must be equal to all tax payers.

How to achieve maximum social advantage

In order to achieve the objective of Maximum Social Advantage:

• Marginal Social Benefit = Marginal Social Sacrifice

 

• Marginal Social Benefit from each unit of public expenditure must be equal

 

• Marginal Social Sacrifice of each unit of tax must be equal

 

b = Social Advantage; t = taxation; e = Public Expenditure; d = small change;

s = Social Sacrifice; 1,2,3…n = various sources of taxation

 

Limitations of Principle of Maximum Social Advantage

 

• Utility cannot be measured quantitatively.
• It is difficult to measure tax burden
• It is difficult to measure social benefit
• Equi-marginal principle is not applicable to Public Expenditure (Social Benefit)
• Policy of functional finance does not permit MSB=MSS