The ‘Principle of Maximum Social Advantage’ was
introduced by British economist Hugh Dalton. According to Hugh Dalton, “Public
Finance” is concerned with income & expenditure of public authorities and
with the adjustment of one with the other. Budgetary activities of the
government results in transfer of purchasing power from some individuals to
others. Taxation causes transfer of purchasing power from tax payers to the
public authorities, While public expenditure results in transfers back from the
public authorities to some individuals, therefore financial operations of the
government cause ‘Sacrifice or Disutility’ on one hand and ‘Benefits or
Utility’ on the other.
The principle
of Maximum social Advantage states that public finance leads to economic
welfare when public expenditure & taxation are carried out up to that point
where the benefits derived from the Marginal Utility of expenditure is equal to
the Marginal Disutility or the sacrifice imposed by taxation. Hugh Dalton
explains the principle of maximum social advantage with reference to: A.
Marginal social Sacrifice B. Marginal Social Benefits
This
principle is however based on the following assumptions:
(i) All taxes
result in sacrifice and all public expenditures lead to benefits.
(ii) Public
revenue consists of only taxes and no other sources of income to the
government.
(iii) The
government has no surplus or deficit budget but only balanced budget.
(iv) Public
expenditure is subject to diminishing marginal social benefit and taxes are
subject to increasing marginal social sacrifice.
Marginal
Social Sacrifice (MSS)
Marginal social Sacrifice (MSS) refers to that amount
of social sacrifice undergone by public due to the imposition of an additional
unit of tax Every unit of tax imposed by the government taxes result in loss of
utility. Dalton says that the additional burden (marginal sacrifice) resulting
from additional units of taxation goes on increasing i.e. the total social
sacrifice increases at an increasing rate. This is because, when taxes are
imposed, the stock of money with the community diminishes. Every additional
unit of taxation creates greater amount of impact and greater amount of sacrifice
on the society. That is why the marginal social sacrifice goes on increasing.
The
diagram indicates that 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. When the unit of taxation was OM1, the
marginal social sacrifice was OS1, and with the increase in taxation at OM2, the
marginal social sacrifice rises to OS2.
Marginal
social Benefit (MSB) While imposition of tax puts burden on the people,
public expenditure confers benefits. The benefit conferred on the society, by
an additional unit of public expenditure is known as Marginal social benefit
(MSB).
Just
as the marginal utility from a commodity to a consumer declines as more and
more units of the commodity are made available to him, the social benefit from
each additional unit of public expenditure declines as more and more units of
public expenditure are spent. In the beginning, the units of public expenditure
are spent on the most essential social activities. subsequent doses of public
expenditure are spent on less and less important social activities. As a
result, the curve of marginal social benefits slopes downward from left to
right as shown in figure below.
In the diagram, the marginal social benefit (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.
When the public expenditure was OM1, the marginal social benefit
was OB1,
and when the public expenditure is OM2, the marginal social benefit is
reduced at OB.
The Point of Maximum Social
Advantage Social advantage is maximized at the point where marginal
social sacrifice cuts the marginal social benefits curve. i.e. MSS and MSB are
equal.
At point P social advantage
is maximum. Now consider Point P1. at this point marginal social benefit is
P1Q1. This
is greater than marginal social sacrifice S1Q1. Since the marginal
social sacrifice is lower than the marginal social benefit, it makes more sense
to increase the level of taxation and public expenditure. This is due to the
reason that additional unit of revenue raised. And spend by the government
leads to increase in the net social advantage. This situation of increasing
taxation and public expenditure continues, as long as the levels of taxation
and expenditure are towards the left of the point P. At point P, the level of
taxation and public expenditure moves up to OQ. At this point, the marginal
utility or social benefit becomes equal to marginal disutility or social
sacrifice. Therefore at this point, the maximum social advantage is achieved.
At point P2,
the marginal social sacrifice S2Q2 is greater than marginal social
benefit P2Q2.
Therefore, beyond the point P, any further increase in the level of taxation
and public expenditure may bring down the social advantage. This is because;
each subsequent unit of additional taxation will increase the marginal disutility
or social sacrifice, which will be more than marginal utility or social
benefit. This shows that maximum social advantage is attained only at point P
& this is the point where marginal social benefit of public expenditure is
equal to the marginal social sacrifice of taxation
--------------------------------------------------------------------x------------------------------------------------------
