LIMITATIONS OF THE PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE
The principle has been criticised on some fundamental grounds:
1. Objective measurement not possible
The principle of maximum social advantage is theoretically explained with the help of the marginal utility analysis. The marginal utility analysis itself is criticized because it is not possible to accurately measure utility or disutility experienced by people.
2. Large budget size
The financial operations of the government involve collection of large sums of money from taxation and other sources and the disbursement of large amounts by way of public expenditure. The effects of small additional amounts of these on the community are difficult to measure.
3.Unrealistic assumption
It is unrealistic to assume that government expenditure is always beneficial and that every tax is a burden to society. For example, taxes on cigarettes or alcohol can provide benefit to society, whereas taxes on education or essential commodities may harm general interest of society.
4. Lack of divisibility
In order to equate the marginal benefit from public expenditure with marginal sacrifice from taxation, government resources are required to be divided into smaller units. But it is not possible because of the lack of divisibility of public expenditure and taxes in small units.
5. Ignores non-tax revenues
This principle takes into consideration the sacrifice on the part of tax payers and ignores non-tax revenues. Non-tax revenues like fines, fees, market borrowings, profits of public undertakings etc. are equally important as sources of revenue and in their effects on social benefit.
6. Different periods
The impact of many public projects is felt over the long period by both the present and the future generations. In order to determine maximum social advantage it becomes necessary to calculate social benefits from public expenditure in short period and in long period separately. It is not possible to equate marginal benefits of expenditures over projects relating to different time periods.
7. Non-economic implications
Public authorities use the principle of maximum social advantage after carefully estimating the economic advantages and disadvantages of any proposed expenditure and taxation policy. They compare the balance of probable gain and loss to the community from various alternative proposed policies.
8. Conceptual differences
Taxes are paid by individuals and the sacrifice involved is felt at an individual or micro level. Whereas, public expenditure gives rise to public goods that are jointly consumed by all in a community.
9. Changes in conditions
Conditions in an economy are not static and are continuously changing. What might be considered as the point of maximum social advantage under some conditions may not be so under some other. For example, in times of war government expenditure and revenue must increase, and the increase is to the advantage of the community. What is optimum at one level of national income may not be so at a higher level. Therefore, it is difficult to determine the point of maximum social advantage and no definite volume of government expenditure and revenue can be considered as being the best.
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