The Principle Of Maximum Social Advantage. ( Meaning , Assumptions , Explanation , Theories , Limitations )

“The Principle of Public Finance means the fundamental rule by which the financial policy of the state is determined.
This fundamental rule of principle of public finance is called “The Principle of Maximum Social Advantage “

The credit for the implementation of this principle goes to Prof. Pigou and Prof. Dalton .
Just like an individual seeks to maximize his satisfaction or welfare by the use of his resources ,the state ought to maximize social advantages or benefit from the resources at its command .

According to Dalton , principle lies “at the root of public finance “.
The principles of maximum social advantage are applied to determine whether the tax or the expenditure has proved to be the optimum benefit .

He stated “The best system of public finance is that which secures the maximum social advantage from the operation which it conducts “
This principle is also called as ” Principle of Maximum Social Benefits “

Prof Pigou called this principle ” The Principle of Maximum Aggregate Welfare “


Significance of the principle :-

Public revenue and public finance are two important financial operations of the state. These operations should be performed on fundamental principles so as to obtain maximum social benefit .

Prof. Hugh Dalton and Prof. Pigou were two famous economists who implemented the principle of Maximum Social Advantage to give the fundamental basis of the function performed by the state to earn revenue and to spend the revenue in the best possible way to Maximum benefit incrementation in the welfare of the public .


Prof. Dalton has expressed it in these words ,
“As a result of operations of public finance ,the nature and quantity of money produced and between the categories and different persons there are many changes in the distribution of that money . The question is do these changes ; leave a profitable impact on society ? If it is so then it will be considered that the operations of public finance are justified , otherwise not .The best system of public finance is that can obtain maximum social profit by the operation organised by them .”

Therefore , the Principle of Maximum Social Advantage is the principle that guides the operation of financial activities of the government to obtain economic welfare of the society .

According to Dalton , attainment of the principle requires :-

• Public expenditure and taxation should be carried out up to certain limits i.e where marginal utility received by the Government expenditure must be equal to marginal disutility due to taxation ( government income ).

• Public expenditure should be utilised among the various uses in an optimum manner

• The different sources of taxation should be so trapped that the aggregate sacrifice entailed is the minimum .


Assumptions :-

• The public revenue consists of only taxes ( and not gifts , loans , fees ,etc.,) and the state has no surplus or deficit budgets.

•Public expenditure is subject to diminishing marginal social benefits and the taxes are subject to increasing marginal cost or disutility .


Principle Of Maximum Social Advantage:-

The Principle states that :-

“The state should collect revenue and spend the money so as to maximize the welfare of the people. When the state imposes taxes, some disutility is created. On the
On the other hand, when the state spends some money, there is a gain in utility. The state should so adjust revenue and
expenditure that surplus of utility is maximised and disutility is minimised.”

According to Dalton , “ maximum social advantage is at a point where the Marginal Social Sacrifice of Taxation ( MSS) and Marginal Social Benefit ( MSB) are equal .
The point of equality between MSS and MSB is referred to as the point of maximum social advantage or least aggregate social sacrifice .

• Maximum social sacrifice of taxation :-

The amount of social sacrifice undergone by the public due to the imposition of an additional unit of tax is called Maximum Social Sacrifice of taxation .
Every unit of tax imposed by the government taxes result in loss of utility.

According to Dalton ,
“The additional burden (marginal sacrifice) resulting from additional units of taxation goes on increasing. Every additional unit of taxation creates greater amount of sacrifice on the society”

The Marginal Social Sacrifice (MSS) curve rises upwards from left to right. This indicates that with each additional unit of taxation, the level of sacrifice also increases.

•. Marginal Social Benefit :–

The benefit conferred on the society, by an additional unit of public expenditure is called the Marginal Social Benefit curve .

The social benefit from each additional unit of public expenditure declines as more and more units of public expenditure are spent. The marginal utility from commodity to a consumer declines as more and more units of the commodity are made available to him .

MSB curve slopes downward from left to right. This indicates that the social benefit derived out of public expenditure is reducing at a diminishing rate.

Maximum social welfare can be understood by the following example :-

It can be seen in the above table that marginal sacrifice is increasing due to the increase in every unit weight of tax on society.
Inversely , from every additional unit of Government expenditure ,its utilities diminish .

On the third unit of currency , marginal social sacrifice is equal to marginal social advantage ( 9 units ) . At this point the tax and public expenditure will be fixed .

In the above given figure ,
MSS represent marginal social sacrifice of the taxation curve , slopes upward since taxation increases resulting in Increasing of MSS,.
and MSB represents the marginal social benefit of the public expenditure curve , slopes downwards showing that public benefit goes on declining with every unit increase in public expenditure.

The point E where the MSS curve intersects MSB curve , is the ideal point of financial operations where the government collects OM taxation from the society and uses it for public expenditure .


According to Dalton ,
“Public expenditure in every direction should be carried just so far that the advantage to the community of a further small increase in any direction is just counterbalanced by the disadvantage of a corresponding increase in taxation or in receipts from any other source of public income . This gives the ideal public expenditure and income.”


Musgrave’s View :-

The Principle of maximum social advantage can be explained using total sacrifice and total benefit curve as well .

Musgrave called Dalton ‘s principle as
“Maximum Welfare Principle Of Budget Determination “
According to him , the difference between total social benefit and total social sacrifice is the net social benefit where maximum social benefit is obtainable .

The TSB curve represents total social benefit received from public expenditure which slopes upward but decreases after some time , showing that as public expenditure increases total social benefit increases .
The TSS curve represents total social sacrifice produced due to tax showing that as total social sacrifice increases with increase in amount of tax but rapidly .

Maximum social benefit will be achieved at a point where the difference between total social benefit and total social sacrifice is maximum .
MN denotes the difference between TSB and TSS showing net social benefit.



Objective Tests Of Social Advantage :-

Dalton has given the following three objective Tests which can lead to Maximum Social Advantage :-

• To preserve the Community :-
According to Dalton , the first test is the need to preserve the community against internal disorders and external attacks. The financial operations of the state to preserve the society in this manner leads to maximum social advantage .

• To increase Economic Welfare :-
Increasing the economic welfare of the community leads to maximum social advantage . According to Dalton ,this can be achieved by improvements in production and improvements in the distribution of national product ( or income ) through state’s financial operations .

• To provide for Future Generation :-
According to Dalton , the financial operations of the state should provide for the future generation . The state should prefer a larger social advantage in the future to a smaller one in the present .



Limitations of Maximum Social Advantage :-

In spite being guiding principle of financial operations of the state , the principle of maximum social advantage possesses the following limitations :-

• Vague and Abstract :- The terms “benefit ” and “sacrifice ” are vague and abstract concepts. It is not possible to quantify them and find out their exact implications.


• Different Areas :-
It is not possible to compare the marginal benefits accruing to people in one area from a given public expenditure with marginal sacrifice undergone by persons who are taxed in some other areas .

• Lack of Divisibility :-
In order to equate the marginal benefit from public expenditure with the marginal sacrifice from taxation , the resources are required to be divided into smaller units . But it is not possible because of the lack of Divisibility of public expenditure and taxes in small units .

• Ignores Non- Tax Revenues:–
This principle takes into consideration the sacrifice on the part of direct tax payers and ignores Non- tax revenues like fines , fees ,market borrowing , profits of public undertaking ,etc., are equally important sources of revenue and in the effects on social benefit are as important as those of taxes.

• Maintaining Balance :-
It is a difficult task for the state to maintain balance between disutility and utility produced due to imposing tax and utility obtained by people from the Government expenditure as the government is not a single person but different servants at different places in different departments .

• Simultaneous Calculation not Possible :-
This principle requires simultaneous calculations and equating marginal social benefits from public expenditure and sacrifices from taxation which is not easy .
As put by Prof. Buchana , ” To match them is a function for the’ fiscal brain ”and ‘computers ‘. “

According it Dalton , despite these limitations ,the principle of maximum social advantage is “the best system of public finance “.