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 .
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.
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.
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.
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 less.
Pigou ‘s condition of maximum social advantage:-
This will result in net social benefit(nsb). Nat social benefit is the difference between MSS and MSB..
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.
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. .
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) .
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.