The presentation gives an overview of one of the most important principles of public finance i.e Principle of maximum social advantage.

1. Principle of Maximum Social
Advantage
By Humsi Singh

2. Introduction
Public Finance and Principles
Public finance is the study of the role
of the government in the economy. It is
the branch of economics which
assesses the government revenue and
government expenditure of the public
authorities and the adjustment of one
or the other to achieve desirable
effects and avoid undesirable ones.
A principle is a concept or value that is
a guide for behavior or evaluation. In
law, it is a rule that has to be or usually
is to be followed, or can be desirably
followed, or is an inevitable
consequence of something, such as
the laws observed in nature or the way
that a system is constructed.
Public Finance Principles

3. Dalton’s Principle of Maximum
Social Advantage
Key terms...
Public Expenditure
and revenue
Marginal Social
Sacrifice
Marginal Social
Benefit
Public expenditure is
spending made by the
government of a country on
collective needs and wants
such as pension, provision,
infrastructure, etc
Government revenue is
money received by a
government.
Marginal Social Sacrifice
(MSS) refers to that amount
of social sacrifice
undergone by public due to
the imposition of an
additional unit of tax.
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).

4. British Economist-
Hugh Dalton
Economist behind the theory of
Principle of Maximum Social
Advantage
Edward Hugh John Neale
Dalton, Baron Dalton, PC was a
British Labour Party economist
and politician who served as
Chancellor of the Exchequer
from 1945 to 1947.
According to Hugh Dalton, "The
best system of public finance is
that which secures the
maximum social advantage from
the operations which it
conducts."
His 'Principle of Maximum Social
Advantage (MSA)' is the
fundamental principle of Public
Finance.

5. Explanation of
the Principle
The PMSA implies that public
expenditure is subject to diminishing
marginal social benefits. And taxes are
subject to increasing marginal cost.
A rational state seeks to maximise the
net social advantage of its fiscal
operations. The social net advantage is
maximum when the aggregate social
benefits resulting from public
expenditure is maximum and the
aggregate social sacrifice involved in
raising the public revenue is minimum.

6. Concept of
Marginal Social
Sacrifice
Every unit of tax imposed by the
government taxes result in loss of utility.
Dalton says 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. This is
because, when taxes are imposed, the
stock of money with the community
diminishes. As a result of diminishing
stock of money, the marginal utility of
money goes on increasing. Eventually
every additional unit of taxation creates
greater amount of impact and greater
amount of sacrifice on the society. That
is why the marginal social sacrifice goes
on increasing.

7. Concept of
Marginal Social
Benefit
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. In the beginning, the units of
public expenditure are spent on the
most essential social activities.
Subsequent doses of public expenditure
are spent on less and less important
social activities. As a result, the curve of
marginal social benefits slopes
downward from left to right

8. Point of
Maximum Social
Advantage
Social advantage is maximised 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.

9. Assumptions of the Principle
• All taxes result in sacrifice and all public expenditures lead to benefits.
• Public revenue consist of only taxes and no other sources of income to the
government.
• The government has no surplus or deficit budget but only balanced budget.
• Public expenditure is subject to diminishing marginal social benefit and
taxes are subject to increasing marginal social sacrifice.

10. Limitations of the Principle
• Difficult to measure marginal utility and disutility.
• Difficult to assess the capacity of the people.
• Difficult to know about likings and dislikings of the
people.

11. Conclusion
what we have learnt...
The Principle of Maximum Social Advantage states that public finance leads to
economic welfare when public 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.

12. Thank You!!!
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