MSS curve indicate the sacrifice caused by taxation and borrowing it is an upward tending curve because sacrifice increases along with increased taxation and borrowing. On the Y axis we indicate the sacrifice caused by marginal unit of taxation and borrowing as well as the benefit derived from government spending. On the X axis we indicate the unit of money raised by government from people through taxes as well as spend by the government on the community. This principle can be explained with the help of the above diagram. This is the optimum limits of states public finance utility.
The point of optimum social welfare is that at which the disutility caused by the marginal unit of money raised is equal to the utility caused by the marginal unit of expenditure. Spending resources by government creates utility for those who stand to gain from government expenditure policies. Raising resources through taxation or borrowing creates disutility, for those individuals who are compelled to part with their resources to government. This gives the ideal total both of public expenditure and public income”. Dalton has suggested the manner and extent in which public expenditure and revenue should be incurred and collected.Īccording to him “public expenditure in every direction should be carried just so far that the advantage to the community of a further small increase in any direction is just counter-balanced by the disadvantage of a corresponding small increase in taxation or in receipt from any other source of public income. Extent of Public Revenue and Expenditure Activity : Pigou calls it as the Principle of Maximum Aggregate Welfare. Dalton calls this principle as the Principle of Maximum Social Advantage and Prof. But if the operation leads to the welfare maximization of the majority, the society gains. It should be noted that the individual welfare of all the people cannot be maximized. The state is the media through which such a transfer is affected. Public borrowing transfers resources from individual (generally the richer section) to the society.
Progressive taxation transfers resources from the rich community to the poor. For example, taxation shifts resources from the taxed individual to the community. Most of the operations in public finance are centered around the mechanism of transfer of resources every activity in public finance is brought about from one section to another. Pigon calls it as the Principle of Maximum Aggregate Welfare. Pigou are the two prominent economists, responsible for formulating and popularizing this fundamental principle of public finance. This principle has been referred as the Principle of Maximum Social Advantage. If the assumption of an earlier age are to be rejected as unrealistic and unsound, what should be the guiding principle of public finance?, if public finance is to be treated as a branch of the science of economics, or political science and not merely as a string of Catch Penny maxims, one fundamental principle should lie at the root of it.