DALTON'S VIEWS ON THE PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE

•  DALTON'S VIEWS ON THE PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE

According to Dalton, the main objective of public finance is the maximisation of social advantage and the principle he used to explain the achievement of this objective is the principle of Maximum Social Advantage (MSA). The MSA is the fundamental principle on which public finance is based.

The principle of MSA is based on the following assumptions:

1.All taxes result in sacrifice and all public expenditures lead to benefits.

2. Public revenue consists of only taxes. No other source of income to the government is considered.

3. The government has only balanced budget

that is, revenue is equal to expenditure.

4.Public expenditure is subject to diminishing marginal social benefit.

5.Taxes are subject to increasing marginal social sacrifice.

• Marginal Social Sacrifice (MSS) 

Taxes cause sacrifice to people who have to give up some part of their income. The sacrifice that is experienced by the people when the government imposes an additional unit of taxation is known as the marginal social sacrifice (MSS).

The marginal social sacrifice of taxation increases as the revenue collected by the government from taxes become larger. As the community pays more and more taxes to the government, the sacrifice they experience, in paying every additional unit of money in the form of tax increases. Thus taxes are subject to increasing marginal social sacrifice. This is based on the principle of marginal utility, according to which, the less of a commodity (or money) an individual has, the more will be the disutility or sacrifice she will experience in parting with an additional unit of the commodity (or money).

when the amount of tax is OM1, the MSS imposed by taxation is OS2. When the tax rises to OM2, MSS rises to OS2, and as tax is further raised to OM3, MSS rises to OS3. 

• Marginal Social Benefit (MSB)

Public expenditure is carried out by the government to provide social goods like defence, justice system, free or subsidized food, housing and education, transport system and many other infrastructural facilities to the people. The primary objective of public expenditure is to generate welfare or benefits to the society.

While taxes result in sacrifice by the people, public expenditure results in benefits to them. All public expenditure, assuming they are wisely and productively spent by the government, result in some benefits. The benefit given to society, by an additional unit of public expenditure is known as marginal social benefit (MSB).

When public expenditure is OM1, MSB is OB1, and when public expenditure rises to OM2, MSB falls to OB2, A further increase in public expenditure to OM3, results in MSB falling to OB3. 

• Maximum Social Advantage

Social advantage is maximized at that level of taxation and public expenditure at which MSS is equal to MSB. Any other level taxation and expenditure will achieve less than maximum social advantage. 

The difference between the MSS and the MSB measures net social advantage (NSA). As long as MSB is greater than MSS, NSA will be positive and will add to total social advantage. When MSS is equal MSB, NSA is zero and maximum social advantage is achieved.When MSS is greater than MSB, NSA will be negative resulting in reduction in total social advantage. 

The level of taxation and public expenditure (size of budget activities) is represented on the X-axis and MSS and MSB are represented on the Y-axis. Social advantage is maximized at the point where the MSS curve cuts the MSB curve. This is the point P in the figure Corresponding to P, on the X-axis, OQ represents that level of taxation and public expenditure at which the social advantage is maximum. Any other level of taxation and public expenditure will result in less than maximum social advantage. This is the optimum budget size.

Consider level OQ1, on the X-axis. At this level of taxation and expenditure, MSB is P1 Q1 and MSS is S1Q1. Since MSB is greater than MSS, the government should increase the level of taxation and public expenditure. This is because, each additional unit of revenue raised through taxation and spent through public expenditure, will lead to an increase in net social advantage. This situation will continue as long as the levels of taxation and public expenditure are towards the left of the point P.