Finance

Principle Of Maximum Social Advantage In Public Finance

Principle Of Maximum Social Advantage

The principle of maximum social advantage is the best principle of public finance, according to Hugh Dalton. According to him, on that system of public finance is the which secures the maximum social advantage to the community. Public finance operations i.e. raising revenue an incurring expenditure bring about transference of purchasing power among various sections of the society that influence the volume of production and distribution of wealth.

The various public finance operations will be justified only when they add to the aggregate social welfare. Hence Pigou puts the principle of Maximum Aggregate Welfare which is otherwise known as Maximum Social Advantage. The state should always keep this principle in mind while raising revenues and incurring expenditure on various heads. By social advantage, we mean the excess of social welfare over social sacrifice. Public expenditure creates utility for those who are benefited by it. This is known as social benefit of public expenditure.

On the other hand, imposition of taxes on the community inevitably involves loss of utility or disutility to those on whom it is levied because taxation leads to some loss of purchasing power to people who are to pay them. This is known as social sacrifice. The state will secure maximum social advantage when its fiscal operations maximizes the surplus of Social benefit (flowing from public expenditure) over the social sacrifice (resulting from taxation).

The state should therefore, keep vision over the social benefit and social sacrifice and should continue to compare these two It should continue its fiscal operations so long as social benefit exceeds social sacrifice because in this case the community is the gainer. The fiscal operations (taxation and incurring expenditure) will be continued unless the social sacrifice equals the social benefit and the state should not proceed any further beyond this point. At this point, the sate will enjoy maximum social advantage. If the state proceeds beyond this point, the social advantage will be decreasing.

 The state, therefore, should observe this equilibrium point before proceeding to its fiscal operations because social advantage will not increase beyond this point. The reason is that the social sacrifice of the people will increase in every additional dose of taxation because there would be increasing loss of purchasing power.

On the contrary, the social benefit decreasing with every increase in public expenditure. On the account of the operation of law of Diminishing marginal utility, marginal increase in social sacrifice and marginal decrease in social benefit must be equate to the maximum social advantage. At the point when these two margins meet, the social advantage is the maximum and this point is known the point of Maximum Social Advantage or the point of Least Aggregate Social Sacrifice.

The principle of equi marginal utility should be applied in the field of public expenditure and taxation. The public expenditure should be so distributed over. the various uses so as to yield the same marginal utility from each different use. So also in the field of taxation, marginal sacrifice from various sources and for different class of society must be the same.

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