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.