Principle of Maximum Social Advantage assignment PDF

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1.

Principle of Maximum Representation)!

Social

Advantage

(With

Diagrammatic

a) Overview and Definition The fiscal or budgetary operations of the state have manifold effects on the economy. The revenue collected by the state through taxation and the dispersal of public expenditures can have significant influence on the consumption, production and distribution of the national income of the country. The fiscal operations of the government resolve themselves into a series of transfers of purchasing power from one section of the community to another, along with the variations in the total incomes available in the community. In fact, the fiscal activities of the state affect the allocation of resources, the use of resources from one channel to another, hence, the level of income, output and employment. Hence, it is desirable that some standard or criterion should be laid down to judge the appropriateness of a particular operation of public finance — the government’s revenue and expenditures. In a modern welfare state, such a criterion can obviously be nothing else but the economic welfare of the people. It follows, thus, that the particular financial activity of the state which leads to an increase in economic welfare is considered as desirable. It may be considered as undesirable if such an activity does not cause an increase in the welfare or even sometimes, it may be the cause of a reduction in the general economic welfare. The guiding principle of state policy has been technically desirable as the Principle of Maximum Social Advantage by Hugh Dalton. According to Dalton, the principle of maximum social advantage is the most fundamental principle lying at the root of public finance. Hence, the best system of public finance is that which secures the maximum social advantage from its fiscal operations. Maximum social advantage is the maxim for the states. The optimum financial activities of a state should, therefore, be determined by the principle of maximum social advantage. It is obvious that taxation by itself is a loss of utility to the people, while public expenditure by itself is a gain of utility to the community. When the state imposes taxes, some disutility or dissatisfaction is experienced in the society. This disutility is in the form of sacrifice involved in the payment of taxes — in parting with the purchasing power. Similarly, when the state spends money, some utility is created in the society. Some satisfaction is experienced by a group of people in the society on whom, or for whom, the public expenditure is incurred by the state. This is the social benefit of welfare of the public expenditure. As such, the maximum social advantage is achieved when the state in its financial activities maximize the surplus of social gain or utility (resulting from public expenditure) over the social sacrifice or disutility (involved in payment of taxes.) The principle of public finance, thus, requires the state to compare the sacrifice and benefits of the society in its fiscal operations.

The principle of maximum social advantage implies that public expenditure is subject to diminishing marginal social benefits and taxes are subject to increasing marginal social costs. Thus, an equilibrium is reached when social advantage is maximized, i.e., when the size of the budget is such that marginal social benefits of public expenditures are equal to the marginal social sacrifice of taxation Maximization of social advantage can be seen in the process of collection of taxes and in return providing social needs such as road construction, creation of some employments, stabilizations of basic needs such as feeding and shelter. This therefore means for social advantage to be maximize as per Dalton principle, revenue collected by the Government should be able to satisfy its planned expenditures for that period. For example, considering the rate of council tax in Cameroon set as 10%, and other income from local councils, if the total revenue from such a tax equates 100 000 000 XAF the Government should also carry out planned expenditures of 100 000 000 XAF through public expenditures such as planned construction of road of 25 000 000 XAF, creation of holidays jobs for young students of 25 000 000 XAF, subsidization of basic need for the year at 25 000 000 XAF and Salaries for council workers of 25 000 000 XAF. It is important to note that altering either the revenue curve automatically creates a movement in the expenditure curve to move. For example, if the Government considers to increase the rate of tax collected as revenue, this might cause citizens to ervade from taxes, which will reduce the amount of revenue collected which in return will reduce budget for a project or completely remove the budgeted expenditure thereby bringing the curve into equilibrium.

b)

Diagrammatic Representation

In technical jargon, the maximum social net advantage is achieved when the marginal social sacrifice (disutility) of taxation and the marginal social benefit (utility) of public expenditure are equated. Thus, the point of equality between the marginal social benefit and the marginal social sacrifice is referred to as the point of aggregate maximum social advantage or least aggregate social sacrifice. The equilibrium point of maximum social advantage may as well be illustrated by means of a diagram, as in Fig. 1.

In Fig. 1, MSS is the marginal social sacrifice curve. It is an upward sloping curve implying that the social sacrifice per unit of taxation goes on increasing with every additional unit of money raised. MSB is the marginal social benefit curve. It is a downward sloping curve implying that the social benefits per unit diminishes as the public expenditure increases. The curves MSS and MSB intersect at point P. This equality (P) of MSS and MSB curves is regarded as the optimum limit of the state’s financial activity. It is easy to see that so long as the MSB curve lies above the MSS curve, each additional unit of revenue raised and spent by the state leads to an increase in the net social advantage. This beneficial process would then be continued till marginal social sacrifice (MSS) becomes just equal to the marginal social benefit (MSB). Beyond this point, a further increase in the state’s financial activity means the marginal social sacrifice exceeding the marginal social benefit, hence the net social loss.

Thus, only under the condition of MSS = MSB, the maximum social advantage is achieved. Diagrammatically, the shaded area APB (the area between MSS and MSB curves, till both intersect each other) represents the quantum of maximum social advantage. OQ is the optimum amount of financial activities of the state. Procedures on how to maximize Social advantage efficiently in a local council According to the Lord Young rules the following can be used to maximize Social advantage  

 

introduce a standardized approach to pre-qualification questionnaires (PQQ) for above-threshold procurement oblige councils to publish information on the Government's Contracts Finder portal when above-threshold opportunities and below-threshold opportunities valued £25,000 or more are advertised and when contracts are awarded abolish the pre-qualification stage for below-threshold procurements require payment of invoices within 30 days (including payments along the supply chain).

2. Criticism of the Principle of Maximum Social Advantage To meet financial obligations, the government generates revenue sources through taxes and debts from the public and/or from foreign governments, and agencies. Thus. the science deals how to collect revenues and how to spend them to the most benefit to the citizens. The government has to ensure maximum social Advantage to its citizen. It should balance the social Advantage with social sacrifice. The Principle of Maximum Social Advantage, undoubtedly, has great theoretical significant, but in practice the principle is criticized on the following grounds: Non Measurability of Social Sacrifice and Social Benefit. The major drawback of the principle is that in spite of its theoretical importance, it is actually possible to translate it into practice’ because the Maximum Social Sacrifice (MSS) and Maximum Social Benefits (MSB) cannot accurately be measured. When a tax is levied on a citizen, he suffers hardship on account of loss of purchasing power and likewise he enjoys benefit of social expenditure. But their accurate measurement is not possible. It, thus, reduced the utility of the principle. None-applicability to Borrowings. Loans raised from the public involve no sacrifice as the loans are to be repaid with interest after a specified period. So, this principle does not apply to such social expenditures which are financed through public debts. Non-applicability of Law of Equi-marginal utility to Public Expenditure. The Equimarginal utility is applicable only to individual expenditure and not to public expenditure. An individual always seeks to get maximum utility out of his income by following the law of equi-marginal utility. The state, on the other hand spends money not for an individual’s benefits but for the benefit of the society as a whole and therefore the public expenditure is guided by so many other social and political factors of a non-economic nature. In such a condition, it is not possible to obtain maximum social advantage from the public expenditure. Role as Functional Finance. The role of public finance has greatly expanded in recent years. The concept of functional finance has more emerged. It is now used as an instrument of economic stabilization. It involves surplus budgeting at the time of boom and deficit financing at the time of depression. The policy of functional finance permits no such consideration as the equalization of marginal social benefit with marginal social sacrifice. Assumes Static Condition. The theory assumes a static condition. But the real world conditions are not static. They are dynamic and ever-changing. The circumstances also vary from time to time.

3. differences between Law of equi-marginal Utility in a purely private context and public finance Law of Equi-Marginal Utility has an important place in economics. Even though it is highly criticized, its importance cannot be ignored. This applies in the every field of economics, which is clear from the following

a)

In a purely private context

Field of Consumption This law is very important in the field of consumption because every consumer wants to get maximum satisfaction from his limited income. Along with those goods which consumers are consuming presently; they also keep goods for future consumption, so that they can get equal utility at both the times. In the Field of Production Usually, producer has capital in a limited quantity but he wants to get maximum profit from his investment (Capital) and it is possible only when the production cost would be less and production would be more. So, the producer uses the cheap and more production giving means (factors of production), at the place of expensive means, until marginal productivity of both the means become equal. In this way, law of Equi-marginal Utility is also applicable in the field of production. In the Field of Exchange The main basis of exchange, is this law, because in exchange, goods are purchased and told through money and in every exchange, we compare the utility receiving with utility, giving in return. We keep trying to exchange up to that extent, unless the utility giving become equal, to the utility received. Thus, law equi-marginal Utility is the basis of exchange.

b)

In the Field of Public Finance

The modern state is a welfare state, which undertakes various schemes for enhancing social welfare. The Government can realize the objective of public finance to achieve maximum social advantage through the law of substitution. The use of this law in the field of public finance is clear from the following two points: (i) The welfare state has to push up public expenditure in various directions up to the point, such that the marginal utilities are equal in all of them to ensure maximum social benefit. (ii) The rates of taxation should be devised in such a way that marginal sacrifices of all tax payers are equal. That is charges more tax from rich and charges less tax from poor people and spend that income in such a that the poor can get more benefit in comparison to rich persons. iii) In the field of distribution, this law is helpful in distributing the remuneration in factors of production. National income is distributed in Land, Labour, Capital and Organisation. Share of factors of production is determined according to their marginal productivity. Hence, the producer uses that particular factor more; the marginal productivity of which is more, than its remuneration. REFERENCE

Eso, H. (2008). "Nigeria's Expressway Way to Hell" www.indexmundi.com/nigeria/ gdorealgrowth rate. html https://fr.scribd.com/doc/165826477/Dalton-s-Principle-of-Maximum-Social-AdvantagePublic-Finance https://kalyan-city.blogspot.com/2011/01/dalton-principle-of-maximum-social.html Martin, 0. N. (2008) "How Years of Fiscal Deficits Emasculated the Nigerian Economy" Economic Reflection, Vol. B. No. 5. Owete, F. (2010). "Rep. blames Corrupt Officials for Bad Roads" 234NEXT.Com www.yourarticlelibrary.com/economics/principle-of-maximum-social-advantage-withdiagrammatic-representation/26377...