Introduction To Maximum Welfare Principle ↓
Richard Musgrave designates 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 kickoff is that resources should live on distributed alongside unlike directions inwards such a agency every bit to equalize the marginal provide of satisfaction for each type of expenditure.
The instant is that world expenditure should live on pushed to the signal where the satisfaction Obtained from the concluding rupee spent is equal to satisfaction lost from the concluding rupee taken inwards taxes.
Therefore the size of budget must live on determined inwards such a agency in addition to then that it results inwards maximum welfare to the society.
Musgrave's Diagram - Find Optimum Budget Size ↓
To illustrate the maximum welfare regulation inwards the optimum budget determination, Musgrave uses the next figure :-
Explanation of inwards a higher house 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 inwards the upward management in addition to the 'Marginal Social Sacrifice' (MSS) is measured inwards downward direction.
The 'Curve EE' indicating the marginal social create goodness of successive units of world expenditure, allocated optimally betwixt unlike world 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 Earth budget (by agency of taxation in addition to world expenditure) in addition to is arrived past times deducting TT from EE.
The 'Optimum Size of Budget' is determined at OM, where marginal internet benefits are nil. Therefore, the Government must cook the total of taxes in addition to world expenditure equal to OM. At signal M, the maximum-sacrifice approach to the decision of taxes is matched past times maximum-benefit approach to the resources allotment of world expenditure, in addition to the 2 aspects are combined inwards 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 inwards reverse 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 grand (i.e. M1), marginal social create goodness (M1P1) volition live on greater than marginal social sacrifice (M1Q1) in addition to marginal internet benefits volition live on positive. Therefore, it would brand feel to growth the taxation in addition to world expenditure. Thus, in that place volition live on style to motility towards signal M.
At whatsoever signal afterwards grand (i.e. M2), marginal social sacrifice (M2Q2) volition top marginal social create goodness (M2P2), in addition to the marginal internet benefits volition live on negative. Therefore, it would brand feel to cut back the taxation in addition to consequently reduction inwards world expenditure. Thus in that place volition live on 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 past times 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.
