Q : Explain and Critically examine the theory of Maximum Social Advantage ?

Answer: Modern state is welfare state who aims to ensure maximum social welfare for the people.

Prof. Dalton & Prof. Pigou formulated this principle of maximum social advantage or welfare. A/C to
them both revenue and public Expenditure Simultaneously maximum economic welfare of the
society. Principle states that main source of government’s revenue is taxes and the public authorities
should thus make expenditures to maximize the welfare of the people. Tax is the major source of
revenue and is considered evil as it is taken by force and creators a negative impact as some
disutility or dissatisfaction is experienced due to it. A/c to this law income & expenditure of yields
greatest advantage to society in the whole. Balance between public revenue and public expenditure
should be such that major portion of society gets maximum social advantage/benefit.

Prof. Dalton suggests that public expenditure in every direction should be up to the point that the
advantage to the community of a further small increase in any direction is just counter balance by
the disadvantage of a corresponding small increase in taxation or in receipts from any other source
of public income.

With every additional unit of tax raised the burden of the sacrifice will go on increase and amount of
benefit will go on decreasing. Government first spends more on most important things and increases
expenditure as social pressure increases. With this shift from important expenditure to less
important expenditures marginal social benefit declines. A point is reached this way where benefit
derived from unit of money spent by public.

Authority will be equal to sacrifice imposed in raising that unit of revenue. At this point marginal
sacrifice is equal to the marginal benefit.

In the figure at point P Social advantage is maximum, as MSS= MSB. At P1, MSB is P1Q1, which is
greater than MSS (Marginal Social Sacrifice) which is S1Q1. Since MSS is less than MSB thus level of
taxation will be increased and hence expenditure will also be increased to increase Net social
advantage. This will continue till point P where level of taxation & expenditure is OQ. At P2 MSS is
S2Q2 greater than MSB p2Q2. Thus beyond point any increase in taxation & expenditure reduces
social advantage Maximum Social Advantage is only achieved at point P where marginal benefit or
utility is equal to marginal disutility or sacrifice. Beyond this point each subsequent unit of additional
taxation will be more than marginal utility or social benefit.