The Principle Of Maximum Social Advantage

Prof. Dalton and Prof. Pigou are the two prominent economics who formulates "The principle of maximum social advantage." The principle governs  both operations of public finance i.e. revenue and expenditure. The principle says that public authority should collect revenue and spend it to maximize public welfare. Tax is a major source of revenue which when imposed causes a sacrifices and dis-utility among tax payers. But, when the state spends the money, there is some gain in utility. The principle says the state should adjust revenue and expenditure in a manner such that the utility is maximized and dis-utility is minimized. The ideal point of the principle is where marginal sacrifice and marginal social benefit equate.

MAXIMUM SOCIAL BENEFIT :-

            In the figure MSS curve represents the marginal social sacrifice and MSB curve represents marginal  social benefit. MSS curve is rising with the increase in taxation. This happens due to increase in the level of taxation. The MSB curve is falling with increase in public expenditure. This is because the marginal benefit derived from successive expenditure goes on falling. "E" is the point where MSS and MSB are at equilibrium, and it is here that MSB would be achieved. BSE is the area of social benefit caused to the society.It is obtained by deducting MSS from MSB (MSB-MSS) which is taking place at OM which is the optimum limit of states financial activity.

TEST OF MAXIMUM SOCIAL ADVANTAGE :-

1. Political Stability :- Political stability is the basic condition for economic progress. Therefore, it becomes the foremost duty of the government to strengthen its defense policy against internal as well as external aggression.

2. Improvement in Production :- The principle of maximum social advantage can only be realized if production increase both quantitatively and qualitatively.

3. Improvement In Distribution :- The fiscal operation of public finance should help to reduce the gap between the rich and poor.

4. Full Employment :- Fiscal operations should be such, which may promote full-employment in the economy.

5. Economic Stability :- The fiscal policy of an economy should be such that it should minimise the cyclical fluctuations.

6. Provision For Future :- The State should choose a greater advantages for the future generation than a smaller advantage for the present. In the words of Prof. Dalton, "The statesman is a trustee for the future, no less than for the present. Indiviuals die, but the community, of which they form part, lives on. The stateman, therefore, should prefer a larger social advantage in the future to a smaller one of today."

LIMITATIONS :-

1. Difficult to Measure Marginal Utility :- It is difficult to measure the 'marginal utility' or 'marginal dis-utility' of the individuals constituting the State.

2. Difficult To Achieve Equilibrium :- Maximum Social Advantage is promoted where MSB=MSS, which extremely difficult for the state to attain.

3. Static :- The principle fails in the dynamic conditions since MSA may differ.

4. Inconsistency :- Disutility in paying taxes is a macro problem. So, comparison of both means inconsistency.

5. Trade Cycles Ignored :- The principle does not deal with the problem of the trade cycles.

6. Public Borrowings Ignored :- According to the concept revenue of the state is generated through taxes causing dis-utility. The principle fails since it ignores public borrowings as a source of revenue, which may not cause dis-utility.