Principle of Maximum Social Advantage

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Transcript Principle of Maximum Social Advantage

Principle of Maximum Social
The principle of maximum social
advantage takes into consideration both
the aspects of public finance that is
government revenue or taxations as well
as government expenditure.
It is developed by dalton and pigou.
It is based on the fact that neither every
tax is an evil nor every expenditure is
• Condition of maximum social advantage:-
• The condition of maximum social advantage are
as follow:• 1. The social benefit from the rupee spent
(MSB) on public expenditure should be equal to
the sacrifice from the last rupee collected(MSS)
by way of tax. It implies that MSB=MSS.
• 2. Public expenditure should be so distributed
among various schemes that benefit of last rupee
spent on every scheme should be equal.
• 3. Taxations should be levied in different
direction such that sacrifice from last rupee
collected from every direction should be equal.
• This depends upon the diminishing marginal
utility and equi-marginal utility. The maximum
satisfaction is achieved when marginal social
sacrifice due to taxation become equal to
marginal social benefit due to expenditure.
• Thus the position of maximum social advantage
is achieved when,
• The government should strike a balance between
the public expenditure and public revenue in
such a way as could yield maximum satisfaction.
• Marginal Social sacrifice:• When a tax is levied, people have to part with
their money to pay the taxes. The loss of
money results in reduction of purchasing
power and the level of consumption.
• Thus every additional tax imposes a greater
burden on the society than the proceeding
one. In other words increase in marginal social
sacrifice takes place.
The MSS curve indicates the rising marginal social
sacrifice with every increase in the tax. When the
amount of taxes increase from OM to OM1 the
marginal social sacrifice increases from NM to NM1.
• Diminishing marginal social benefit(MSB):•
when the government undertake public
expenditure the society gets utility . But as more
and more benefits are provided to the people , its
utility to them goes on diminishing.
• The MSB curve indicates diminishing marignal social
benefit. When the public
expenditure increase from
OM to OM1 the marginal social benefits decline from
LM to L1M1.
• Maximum social advantage:• since , the marginal social benefit goes on
diminishing and marginal social sacrifice goes on
increasing with every additional change in
expenditure and taxes respectively, the government
goes on comparing marginal social sacrifice with
marginal social benefit while it impose taxes or
makes public expenditure.
• In this diagram point p is showing the position of
maximum social advantage, MSS=MSB, as shown by
OM. at this point ,government expenditure becomes
equal to the government revenue as shown by ON. if
the government Imposes the tax which exceed ON,
• as shown by ON1 MSS will be greater than MSS
(msb<mss). It will result into less social advantage .
Similarly if the government keeps its expenditure less
than ON , as shown by ON2 MSB will be greater than
MSS , yet the aggregate welfare of the society will be
Pigou ‘s condition of maximum social
advantage:• Pigou stated that the condition of maximum social
advantage is that situation in which ,”expenditure
should be pushed in a direction up to the point at
which satisfaction obtained from the last shilling
spent is equal to the satisfaction lost in respect of the
last shilling paid as tax of the government.
• This will result in net social benefit(nsb). Nat social
benefit is the difference between MSS and MSB..
• Mss curve is intersecting msb curve at point E. the
area AEB shows maximum social advantage.
• The principle of maximum social advantage may also
be explained by using the concept of aggregate social
sacrifice and aggregate social benefit . The net social
advantage is the difference between aggregate or
total social sacrifice and aggregate or total social
• TSS is the total social sacrifice curve and ASB is
aggregate social benefit curve. TSB curve is rising
upward but after a point it rises at a diminishing rate.
TSS curve is also rising upward but after a point it
rises at a increasing rate. In order to find out the
maximum point of ASB(TSB) and ASS(TSS) , we have
to draw a tangents to these curves. The tangent T1T1
touches TSB curve at its maximum point E. the
tangent T2T2 touches TSS curve at its maximum
point F. .
• Thus, TSB= EM
• Net total social advantage = TSB- TSS
• Dalton’s condition of maximum social
• Dalton’s condition of maximum social advantage is
explained with help of diagram. the curve BB1 shows
the MSB accruing to the society from different
amount of public expenditure. The curve dd 1 shows
marginal social cost to the society from the taxation.
The difference between BB1 and DD1 shows net
social benefit. the NN1 curve indicates the
difference between bb1 and dd1 curve. It can be
found that when an output OM is taxed and spent by
the government , both msb and msc are equal
(mp=mq) .
• Musgrave’s condition of maximum social
advantage:• Musgrave has explained the situation of maximum
social advantage with a different diagram. He is of
the opinion that maximum social advantage is
achieved at where nsb is zero. The NSB is the
difference between MSB and MSS.
• The upper part of the figure represents the social
benefit to the society from the public expenditure.
The aa1 curve is the msb curve. Bb1 curve is the mss
curve. Curve cc1 is the net social benefit curve.
• It is calculating by deducting bb1 from aa1. in the
beginning nsb is positive (since msb>mss) till taxation
and public expenditure reached at point E .poin E is
the optimum point which represents maximum net
social benefit, (msb=mss). This implies that
government should raise OE amount from taxation
and should spend them for social benefit. After point
e, any further taxation and expenditure will result in
mss being greater than msb.