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Limitations of the Principle of Maximum Social Advantage

square Criticism - Principle of Maximum Social Advantage ↓

The principle of maximum of social advantage has been criticised on various grounds. The ten main practical difficulties in following the principle of maximum social advantage are discussed in the article.

Limitations of the Principle of Maximum Social Advantage

1. Difficulties in measuring social benefit

The principle of maximum social advantage is theoretically explained with the help of the marginal utility analysis. The marginal utility analysis itself is criticized because it is not possible to measure utility or disutility experienced by people. The marginal benefits of public expenditure and the marginal disutility on sacrifice of public revenue are concepts, the objective measurement of which is extremely difficult.

2. 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.

3. 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.

4. Lack of divisibility

The marginal benefit from public expenditure and marginal sacrifice from taxation can be equated only when public expenditure and taxation are divided into smaller units. But this is not possible practically.

5. 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.

6. Assumption of static condition

Condition in an economy are not static and are continuously changing. What might be considered as the point of maximum social advantage under some conditions may not be so under some other. For example, in times of war government expenditure and revenue must increase, and the increase is to the advantage of the community. What is optimum at one level of national income may not be so at a higher level. Therefore, it is difficult to determine the point of maximum social advantage.

7. The effect of budgetary policy spill over to the future

The difficulties in the measurement of social benefits and social sacrifices are further compounded by the fact that the effects of the budgetary policy of the government are not limited to the period of a single budget but mostly spill over to a number of budget periods in future.

For example, a part of the public expenditure goes to the funding of projects and schemes, the returns from which are likely to accrue after a long lapse of time, say after a generation or two. Measurement of such future benefits is still more difficult. Accordingly, the efforts to equate marginal benefits (utilities) of expenditure over different periods of time are not likely to succeed.

8. Inconsistent methodology

The utility of public expenditure to the society as a whole is a macro problem and the disutility of taxation to the tax payer is a micro problem. Thus there is methodological inconsistency in balancing marginal social benefits from public expenditure with the marginal sacrifice of taxation.

9. 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.

10. Contra-cyclical measures

The Government has to undertake contra-cyclical measures to :-

  • Control inflation,
  • Overcome recession,
  • Reduce increasing level of unemployment, etc.

In such a situation, the concept of Maximum social advantage cannot be adopted. For instance, to control recession, the government may introduce certain measures such as reduction in taxation in order to increase effective demand. Also, during inflationary periods, the government may increase tax rate in order to reduce demand and increase interest rates, so as to encourage savings on the part of people. Therefore, the question of additional tax revenue by increasing tax rates does not arise in the case of contra cyclical measures.

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