Adolf Wagner's theory of INCREASING STATE ACTIVITIES

                Adolf Wagner's theory of INCREASING STATE ACTIVITIES

Introduction:-
Adolf Wagner, the German economists made an in depth analysis relative to the rise in govt. expenditure in the late 19th century. Based on his study he propounded a low called, "The low of increasing state activity."
Explanation of the theory:-
 Wagner's low states that 'as the economy develops over time, the activities and functions of the govt. increase.'
According to Adolf Wagner, "Comprehensive comparisons of different countries and different times show that among progressive people(societies), with which along we are concerned- an increase regularly takes place in the activity of both the central govt. and local govts. constantly undertakes new functions, while they perform both old and new functions more efficiently and more completely. In this way, economic needs of the people are in an increasing extent and in a more satisfactory fashion are satisfied by the central and local govts."

WAGNER'S STATEMENT INDICATES THE FOLLOWING POINTS

1. In progressive societies, the activities of the central and local govt. increase on a regular basis.
2. The increase in govt. activities is in both extensive and intensive.
3. The govt. undertake new functions in the interest of the society.
4. The old and new functions are performed more efficiently and more completely than before.
5.The purpose of the govt. activities is to meet economic needs of the people.
6. The expansion and intensification of governmental function lead to increase in public expenditure. 

Theory of Maximum Social Advantage

                                         Theory of Maximum Social Advantage
Introduction: This formula was put forward by the British economist, Hugh Daltotn. According to him, that system of public finance is the best which secures maximum social advantage to the community. The fiscal operation of the state should therefore be determined by the principle  of maximum social advantage.
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Assumptions:
1.All taxes result in sacrifice and all public expenditures lead to benefit.
2. Public revenue consist of only taxes and there is no other source of income to the government.
3. The govt. has no surplus or deficit budget but only a balanced budget.

THE THEORY: Taxation leads to some loss of purchasing power by the taxed people. This is the social sacrifice of taxation. Likewise, the spending of money by the state leads to gain of utility by those who are benefited by it. This is the social benefit of public expenditure.
State should continue with it's fiscal operations so long as the social benefit exceeds the social sacrifice, because thereby the community will be the net gainer. The state shall  be maximsing  the net social advantage by continuing with it's fiscal operations. But the state should not proceed beyond the point where the social sacrifice equals the the social benefit. In case it does so, the net social advantage shall  be less than the maximum. The net social advantage shall be maximum only at the point where the social sacrifice equals the social benefit.
Introducing the concept of margin on both sides,the state should secure maximum social advantage by equating the marginal social sacrifice (involved in taxation) with the marginal social benefit (flowing from public expenditure). The point of equality between the marginal social sacrifice and the marginal social benefit is known as the point of maximum social advantage or the point of least aggregate social sacrifice.

Diogramatical Explanation


In the above diagram, MSS is the marginal social sacrifice curve sloping upward from left to right. This rising curve indicates that the marginal social sacrifice goes on increasing with every additional dose of taxation.   MSB is the marginal social benefit curve sloping downwards from the left to right. This falling curve indicates that the marginal social benefit diminishes with every additional dose of public expenditure. The two curves MSS and MSB intersect each other at the point P. PM represents both marginal social sacrifice as well as marginal social benefit. Both are equal at OM which represents the maximum social advantage.

Criticism:-

1. Non measurability of social sacrifice and social benefit:-
The major drawback of this principle is that it is not possible in actual practice to measure the MSS and MSB involved in the fiscal operation of the state.
2. Non applicability of the low of equimarginal utility in public expenditure:-
The low of equimarginal utility may be applicable to private expenditure but certainly not to public expenditure.
3.All taxes don't result in sacrifice and all public expenditures donot lead to benefit.
4. Public revenue don't consist only of taxes and there is other source of income also to the government.
4. "The govt. has no surplus or deficit budget but only a balanced budget."- is an invalid assumption.

Summing up:-
Despite of all the limitations, the theory of maximum social advantage has been occupying an important place in economics as a leading theory of public finance.

Market Economy and Public Sector

                                        Market Economy and Public Sector


What is market economy?
A market economy or  free market economy is an economic system in which the production and distribution of goods and services take place through the mechanism of free market guided by a free price system. In a market economy, businessmen and consumer will decide what to produce, how much to produce, what to change customers for their products, what to pay employees.  What to consume, how much to consume and at what price- all these are influenced by the pressure of completion, supply and demand. In real world, there is no nation that has a pure market economy.

Public sector:

Public sectors refer to those economic sectors which are controlled, owned and operated by the government. 

Problems faced by Public sector in the expansion of Market Economy:-

Public sector carries socialistic characteristics whereas market economy carries capitalistic characteristics. So, obviously conflict arises between market economy and public sector.
Sometimes public sector seems to have certain capitalistic characteristics in a market economy. In such a situation, public sector has to conflict with private sector. As a result, public sector has to sacrifice its socialistic characteristic and social obligations.
The objective of market economy is to maximize profit whereas the objective of public sector is to ensure maximum social welfare. Therefore the existence of market economy limits the scope of public sector in fulfilling its objectives specially when certain goods and services are produced by public sector and the task of distribution is entrusted to market economy.

Dose the Expansion of Market Economy reduces the Scope of Public Sector?
1stly the government makes provision for health, sanitation, education, transport etc. to bring about welfare of the people. In this way, the government acts as a provider. Secondly, the government  tries to facilitate the expansion of private sector by creating infrastructural development . Without infrastructure, expansion of private sector is not possible. For example, development of industry with private initiative needs proper transport, communication system power etc. Therefore by providing such infrastructure, the government paves the way of expansion of private sector. Thirdly, the government undertakes regulatory measures so that economic welfare and stability- both are maintained properly. As a government performs the tasks of provider, facilitator and regulator in most of the countries of the world, therefore it can be concluded that the expansion of market economy doesn't reduce the scope of public sector as well  as the scope of  public finance.

Scope of Public Finance

                                                       Scope of Public Finance



The scope of public finance includes the following.

1. Public Revenue
In this branch, we study all those sources from which the government derives its revenues
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2. Public expenditure
Here we study the main principle of public expenditure. Along with that, we also study all those ways and means through which the government keeps check on its expenditure.

3. Public debt
The government expenditure often exceeds government income in abnormal times. To meet the deficit in the budget, the government borrows from the public. Modern governments also borrow from the public to promote the economic development of the country.

4. Financial administration
In this branch, we study such important subjects as the financial management by the government, the preparation of the budget and its final acceptance by the legislature. We also study here how the government keeps a check on its expenditure through auditing of accounts etc.