Principle of

maximum social
advantage
 Meaning
The 'Principle of Maximum Social Advantage'
was introduced by British economist Hugh
Dalton.
The Principle of Maximum Social Advantage
states that public finance leads to economic welfare
when pubic expenditure & taxation are carried out
up to that point where the benefits derived from
the MU (Marginal Utility) of expenditure is equal
to the Marginal Disutility or the sacrifice imposed
by taxation.
Assumptions
The public revenue consists of only taxes
( and not of gifts, loans, fees etc.) and the
state has no surplus or deficit budgets.
(balanced budget)
The law of diminishing marginal social
advantage applies to the public
expenditure
The taxes are subject to increasing
marginal social disutility
Dalton conditions of
maximum social advantage
Public expenditure in every direction
should be carried out just so far that the
advantage to the community is just
counter balanced by the disadvantage of
a corresponding small increase in
taxations
 Marginal Social Sacrifice (MSS) ↓

Marginal Social Sacrifice (MSS) refers to that

amount of social sacrifice undergone by public due
to the imposition of an additional unit of tax.
Every unit of tax imposed by the government taxes
result in loss of utility. that the additional burden
(marginal sacrifice) resulting from additional units
of taxation goes on increasing i.e. the total social
sacrifice increases at an increasing rate.
 Marginal Social Benefit (MSB) ↓
While imposition of tax puts burden on the people,
public expenditure confers benefits. The benefit
conferred on the society, by an additional unit of
public expenditure is known as Marginal Social
Benefit (MSB).
Just as the marginal utility from a commodity to a
consumer declines as more and more units of the
commodity are made available to him, the social
benefit from each additional unit of public
expenditure declines as more and more units of
public expenditure are spent.
 The Point of Maximum Social Advantage ↓
Social advantage is maximized at the point where
marginal social sacrifice cuts the marginal social
benefits curve.
This is at the point P. At this point, the marginal
disutility or social sacrifice is equal to the marginal
utility or social benefit. Beyond this point, the
marginal disutility or social sacrifice will be higher,
and the marginal utility or social benefit will be
lower.
 Significance
INCREASE IN PRODUCTION : in order to
maximize the social benefit , there should be
such changes in the revenue and expenditure of
the government as could stimulate production
and could increase employment and exports
1. such improvements are made in the production
technique as a result of which production per
worker goes up
2.such improvement should be made by the means
of which minimum wastage of resources takes
place
Equitable distribution of wealth : for this
purpose the taxation process should be
changed in such a way that more and more
wealth is collected from the rich and the same
is spent on providing more and more facilities
to the poor.
Political stability : social welfare and
production efficiency are promoted where
there is peace and order within and the
country is protected against any external
aggression.
Economic stability : by pursuing an
appropriate fiscal policy , government should
avoid economic fluctuations which is a pre
condition to achieve social welfare
Full employment : Every government
aims at achieving the goal of full
employment through its fiscal policy. Full
employment maximizes production and
social welfare.
Future consideration : It is duty of the
government to safeguard the interests of
the future generation also while utilizing
the available natural resources in the
present.
Limitations
 Measurement of both sacrifice and benefit is
difficult
 It is difficult to make an estimate of
maximum social advantage on the basis of
future advantages and present sacrifices.
 It is difficult to estimate how much effect
each tax individually has on public
 Collecting revenue through taxes creates
disutility
 It is incorrect to assume that each tax
involves burden on the people.