Meaning of Maximum Social Advantage
Principle of Maximum Social Advantages is a fundamental principle governing the public finance. It is one that is concerned with the comparison of benefits and sacrifices of society caused by fiscal operations of public authorities. This principle states that public expenditure and taxation need to be carried out till that point where marginal utility of expenditures is equal to marginal disutility of taxes imposed in order to derive maximum social advantage.
Principle of maximum social advantage defines the best public finance system as one that via its fiscal operations secures maximum social advantage for economy. Financial operations of government are assumed to cause utility on one hand and dis-utility on another hand as per this principle. Imposition of heavy taxes by government on public leads to sacrifices by them while public expenditure incurred will result in benefits for public.
Principle of Maximum Social Advantage
Principle of Maximum Social Advantage is explained using 2 concepts by Hugh Dalton, a British economist. These concepts are: –
- Marginal Social Sacrifice
- Marginal Social Benefits
Marginal Social Sacrifice (MSS)
Marginal Social Sacrifice refers to social sacrifice bear by general public resulting out of addition tax imposition by government authorities. Every tax unit imposed by government causes loss of utility for public. When authorities impose additional amount of taxes, it will create greater burden on public and total social sacrifice goes on increasing at an increasing rate. Amount of money holding with public diminishes with the imposition of taxes. As a result of fall in money holding with people, it will lead to increase the marginal utility of money. Therefore, every additional amount of taxation will create more sacrifice on society due to which marginal social sacrifice goes on increasing.
Marginal Social Benefit (MSB)
Marginal Social Benefit refers to additional benefits conferred on society by incurring additional amount of expenditure by public authorities. As imposition of tax creates burden on public, in the same way public expenditure generate benefits for public. The additional amount of social benefit derived from incurring an additional unit of public expenditure keeps on declining as more and more amount is spent. The socials benefits provided by spending additional units of public expenditure decreases at a diminishing rate. Initially, all expenditures are made on most important social activities and after that less essential social activities are preferred.
Assumptions of Principle of Maximum Social Advantage
- All public expenditure generates benefits whereas taxes leads to sacrifices.
- Taxes is the only source of revenue for government.
- Government has a balanced budget and there is no deficit or surplus.
- Taxes are subject to increasing marginal social sacrifice whereas public expenditure are subject to decreasing marginal social benefits.
Government should incur expenditure to that point where marginal utility created out of last dollar or rupee spent is equal to the marginal disutility arising out of last dollar or rupee tax charged from public. This will ensure the maximum social advantage.