Introduction To Maximum Welfare Principle ↓
Richard Musgrave designates blogspot.com//search?q=dalton-principle-of-maximum-social">Dalton's Principle of 'Maximum Social
Advantage' every bit the 'Maximum Welfare Principle of Budget Determination'.
According to Musgrave, Dalton has proposed 2 principles of budget policy.
The rootage is that resources should hold out distributed amid dissimilar directions inward such a agency every bit to equalize the marginal provide of satisfaction for each type of expenditure.
The minute is that populace expenditure should hold out pushed to the signal where the satisfaction Obtained from the final rupee spent is equal to satisfaction lost from the final rupee taken inward taxes.
Therefore the size of budget must hold out determined inward such a agency in addition to thence that it results inward maximum welfare to the society.
Musgrave's Diagram - Find Optimum Budget Size ↓
To illustrate the maximum welfare regulation inward the optimum budget determination, Musgrave uses the next figure :-
Explanation of higher upward Musgrave's diagram is given below :-
The 'Amount of Taxation in addition to Public Expenditure' is measured on the X-axis, in addition to on Y-axis, the 'Marginal Social Benefit' (MSB) is measured inward the upward management in addition to the 'Marginal Social Sacrifice' (MSS) is measured inward downward direction.
The 'Curve EE' indicating the marginal social create goodness of successive units of populace expenditure, allocated optimally betwixt dissimilar populace uses, slopes downwards from left to correct due to diminishing marginal utility of social benefit.
The 'Curve TT' indicating the marginal social sacrifice of successive units of taxation imposed, shifts upwards from left to correct due to increasing marginal disutility or social sacrifice.
The 'Curve NN' measures the internet create goodness derived from successive additions to the populace budget (by agency of taxation in addition to populace expenditure) in addition to is arrived yesteryear deducting TT from EE.
The 'Optimum Size of Budget' is determined at OM, where marginal internet benefits are nil. Therefore, the Government must create the total of taxes in addition to populace expenditure equal to OM. At signal M, the maximum-sacrifice approach to the conclusion of taxes is matched yesteryear maximum-benefit approach to the allotment of populace expenditure, in addition to the 2 aspects are combined inward a full general theory of budget planning.
The optimum size of budget is at signal M, because the marginal social create goodness MP is equal to marginal social sacrifice MQ, i.e., MSB = MSS. Since MSB in addition to MSS is measured inward contrary directions (upward in addition to downward), the marginal internet create goodness is nil. (MSB - MSS = 0). Therefore, the NN bend cuts the X-axis at signal M.
At whatsoever signal earlier yard (i.e. M1), marginal social create goodness (M1P1) volition hold out greater than marginal social sacrifice (M1Q1) in addition to marginal internet benefits volition hold out positive. Therefore, it would brand feel to increase the taxation in addition to populace expenditure. Thus, at that topographic point volition hold out style to motility towards signal M.
At whatsoever signal afterward yard (i.e. M2), marginal social sacrifice (M2Q2) volition overstep marginal social create goodness (M2P2), in addition to the marginal internet benefits volition hold out negative. Therefore, it would brand feel to trim down the taxation in addition to consequently reduction inward populace expenditure. Thus at that topographic point volition hold out a style to motility towards signal M. Thus, at signal M, MSB = MSS. Therefore, according to Richard Abel Musgrave the optimum size of the budget is decided at a signal where marginal internet create goodness is zero.
Conclusion ↓
According to Musgrave the optimum size of budget is given yesteryear the signal where marginal internet create goodness is zero. This signal corresponds to the signal of maximum social wages every bit at this signal MSB = MSS.
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