- MUSGRAVE'S APPROACH
The principle of Maximum Social Advantage has been interpreted by economist Richard Musgrave who termed it as Maximum Welfare Principle of Budget Determination. According to Musgrave, the principle explains that taxation and public expenditure should be carried out up to that level where satisfaction obtained from the last unit of money spent is equal to the sacrifice from the last unit of money taken in taxes. In other words, it should be carried out up to the point where marginal social benefit is equal to marginal social sacrifice.
The curve TT represents the marginal social sacrifice (MSS). As additional units of taxation are raised from the people, MSS increases.
Accordingly, the curve TT slopes downwards from left to right in Fig showing rising MSS .
The curve NN measures marginal net benefits (MNB) which is derived from successive addition to public budget. MNB is calculated by deducting MSS from MSB. The vertical distance between EE curve and TT curve measures MNB at different sizes of the budget
The optimum size of the budget is determined at OM, where MNB is zero. At this size of the budget, the marginal social benefit MP is equal the marginal social sacrifice MQ (MSB = MSS). Since MSB and MSS are measured in opposite directions, marginal net benefit is zero at (MSB-MSS = 0). At this point the MNB curve NN cuts the X-axis.
At any point to the left of M, say M1,MSB will be greater than MSS and MNB will be positive. It is beneficial to increase size of the budget as long as MNB is positive. So there will be a tendency to move from M1 towards M. If the budget size exceeds M, say M2, then MSS will exceed MSB and MNB will be negative. Therefore it will be beneficial for the government to cut down the size of the budget and move from M2 towards M.
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