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Principle of Maximum Social Advantage Introduction The principle of maximum social advantage takes into consideration both the aspects of public finance.

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Presentation on theme: "Principle of Maximum Social Advantage Introduction The principle of maximum social advantage takes into consideration both the aspects of public finance."— Presentation transcript:

1 Principle of Maximum Social Advantage Introduction 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 good.

2 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.

3 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. MSS=MSB

4 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.

5 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.

6 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.

7 sinc 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.

8 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,

9 as shown by ON1 MSS will be greater than MSS (msb

10 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.

11 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 benefit.

12 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 TSS=FM Net total social advantage = TSB- TSS EF= EM-FM

13 Dalton’s condition of maximum social advantage:-

14 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).

15 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.

16 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.

17 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.

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