Principle of Maximum Social Advantage- Assumptions, Conditions, Significance and Limitations

Limitations

Difficulty of Measuring Sacrifice and Benefits

Maximum advantage is determined by marginal social sacrifice and masrginal social benefit or satisfaction.But measurement of both of them is very difficult.Since society is a group of number of people,so it is not easy to measure the sacrifice and satisfaction of every one.Besidesit,utility or satisfaction is subjective.It is not possible to measure it.

Future Advantage

The expenditure made on the development projects yields several benefits in future,but the public is burdened with taxes in the present.Therefore,it becomes difficult to make an estimated of the maximum social advantage on the baiss of future advantages and present sacrifices.

Methodological inconsistency

To some economists,the disutility created by taxation to the taxpayer is a micro matter concerned with individuals,while the utility of public expenditure available to the society as a whole is a macro problem.Threfore,serious mythological inconsistency is involved in balancing microeconomics matter with macroeconimic matter.

 Unrealistic assumptions

It is unrealistic to assume that government expenditure is always beneficial and that every tax is a burden to society. For example, taxes on cigarettes or alcohol can provide benefit to society, whereas a tax on education of essential commodities may harm general interest of society, similarly, expenditure on social overheads like health care will give rise to social benefit whereas unnecessary increase in expenditure on defence may divert resource from productive activities causing loss of welfare to society.

Misuse of government funds

The principle of Maximum social advantage is based on the assumption that the government funds are utilized in the most effective manner to generate marginal social benefit. However, quite often a large share of government funds is misused for unproductive purposes which do not provide any social benefit. Secondly, there is rampant corruption in government departments. The funds meant for public expenditure are often misappropriated, and therefore, the funds generated by way of taxation fails to generate social benefit.

Large budget size

The financial operations of the government involve collection of large sums of money from taxation and other sources and the disbursement of large amounts by way of public expenditure. The effects of small additional amounts of these on the community are difficult to measure. Therefore, in practice, the public authorities are not in a position to estimate the marginal benefits and the marginal sacrifices. It is almost impossible to determine the particular size of budget that will maximize the welfare of the community.

Neglect non-tax revenue

The principle says that the entire public expenditure is financed by taxation. But, in practice, a significant portion of public expenditure is also financed by other sources like public borrowing, profits from public sector enterprises, imposition of fees, penalties etc. Dalton fails to take into account all such other sources.

Difficult to assess the capacity of the people

It is very difficult to measure the capacity of the people of a state which they can afford to apy to the government.Whta people of a country afford,depends upon:

1. The manner in which the money is raised
2. The manner in which the money is spent.

 

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Public Finance