Explain the principles of maximum social advantages with the help of diagram. What are its limitations?

Meaning of Maximum Social Advantage

Principle of maximum social advantage is a key principle governing public finance. It aims at maximizing the economic welfare of people by controlling the financial activities of the government. Maximum social advantage principle was given by “Hugh Dalton”, a British economist. Public finance consists of public expenditure and public revenue. Expenditure by the government creates benefits or utility.

Concept Of Maximum Social Advantage

Then again, when government-forced charges it brings about penance or disutility. As indicated by the maximum social advantage standard, public incomes and uses ought to be changed so that excess of utility is expanded and disutility is limited.

It is accomplished where peripheral utility of consumptions compares the negligible disutility of duty forced. This rule says that the public authority ought to spend based on Equi-peripheral standard and fix charges so that negligible utility of cash paid as duty will be no different for all citizens.

Principles of Maximum Social Advantage

Various principles of maximum social advantage are as follows:-

• All expenditure by government creates benefits whereas taxes imposed by governments lead to sacrificing.
• Government has no source of income other than taxation.
• The government have a balanced budget which means there is no surplus or deficit of funds.
• Marginal social benefit created due to public expenditures keeps on diminishing as these are incurred on the basis of the law of diminishing marginal utility.
• Taxes are subject to increasing marginal social sacrifice.

Limitations of Maximum Social Advantage

Limitations of maximum social advantage principle are discussed in points given below:-

Impracticability

Principle of maximum social advantage is impractical in nature because utility is subjective in nature. It cannot be measured in quantitative terms which make it impossible to equate marginal utility and disutility. Marginal utility created by public expenditure and marginal disutility arising out of public revenue cannot be measured precisely.

Unrealistic Assumptions

This principle is based on unrealistic assumption that public expenditures will always result in benefits and public revenue create disutility for people. Huge expenditure by government on defense is unproductive in nature as it does not create any assets which could provide benefit to people. Whereas, heavy taxation on alcoholic and tobacco products is beneficial for public health.

Ignores Non-Tax Revenues

Principle of maximum social advantage neglects non-tax revenue sources of government. It assumes that taxation is the only means available to government for generating revenue. There are various other means such as public borrowings, imposition of fees, penalties and profits from public sector companies which generates sufficient amount of funds. 

Highly Unrealistic Restrictions

This principle considers that government should always have balanced budget. It is a quite difficult scenario that government does not have any surplus or deficit of funds. Many times government expenditure is more than its revenue due to which it borrows funds from various means for meeting its requirements.

Misuse Of Government Funds

Maximum social advantage principle assumes that government funds are efficiently utilized for creation of social benefits. Public funds are many times misused for non-productive which do not result in any benefit to community. Also, a major part of these funds are loss due to rampant corruption in various government departments.

Large Budget Size

Government budgets are huge in size as it comprises of large disbursement of funds in the form of public expenditure and large collection of funds in the form of taxes. For measuring the marginal utility and disutility, it is difficult for officials to evaluate the effect of small additional amounts on society.