Public finance is a science that deals with the finance (income and expenditure) of public bodies and the government of a nation. The government has to perform obligatory. and optional functions. Obligatory functions include defence and maintenance law and order situation. Other functions are optional. To meet these obligations, it generates revenue sources through taxes and debts from the public and/or from foreign governments, and agencies.
Thus. the science deals how to collect revenues and how to spend them to the most benefit to the citizens. The government has to ensure maximum social Advantage to its citizen. It should balance the social Advantage with social sacrifice.
The principle of maximum social advantage can be illustrated with the help of a diagramme based on the table given below. The table shows that the marginal social sacrifice increases and the marginal social benefit goes on decreasing as the state expands if fiscal operations, i.e. raises more revenue by means of taxation and spends additional amount for public benefit.
In the diagramme, MSS curve moves upward from the left to the right, indicating that marginal social sacrifice goes on increasing with every additional dose of taxation. MSB curve sloping downward from the left to the right indicates that marginal social benefit is continuously falling with every additional dose of public expenditure. The two curves (MSS and MSB) meet at the point D. DM represents both marginal social sacrifice as well as marginal social benefit. So long as the MSB curve lies above the MSB curve, the fiscal operations, of the state would add to the net social advantage of the community.
The net social advantage would go on increasing tell the MSB curve meets the MSS curve at point D. If state continues its fiscal operations beyond the point DM, the MSS will exceed the MSB, causing a fall in the net social advantage. The net social advantage can be maximum only at the point where MSS equals MSB. It is an essential prerequisite for the principle of maximum social advantage.
