Musgrave Maximum Welfare Regulation - Budget Determination

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 start is that resources should move distributed amid dissimilar directions inwards such a agency every bit to equalize the marginal provide of satisfaction for each type of expenditure.

The minute is that world expenditure should move pushed to the indicate 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 move determined inwards such a agency in addition to thence 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 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 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 dissimilar 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 cyberspace create goodness derived from successive additions to Blue Planet budget (by agency of taxation in addition to world expenditure) in addition to is arrived yesteryear deducting TT from EE.

The 'Optimum Size of Budget' is determined at OM, where marginal cyberspace benefits are nil. Therefore, the Government must cook the sum of taxes in addition to world expenditure equal to OM. At indicate M, the maximum-sacrifice approach to the decision of taxes is matched yesteryear 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 indicate 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 contrary directions (upward in addition to downward), the marginal cyberspace create goodness is nil. (MSB - MSS = 0). Therefore, the NN bend cuts the X-axis at indicate M.

At whatever indicate earlier one one thousand (i.e. M₁), marginal social create goodness (M₁P₁) volition move greater than marginal social sacrifice (M₁Q₁) in addition to marginal cyberspace benefits volition move positive. Therefore, it would brand feel to growth the taxation in addition to world expenditure. Thus, in that place volition move vogue to movement towards indicate M.

At whatever indicate afterward one one thousand (i.e. M₂), marginal social sacrifice (M₂Q₂) volition piece of employment yesteryear marginal social create goodness (M₂P₂), in addition to the marginal cyberspace benefits volition move negative. Therefore, it would brand feel to trim the taxation in addition to consequently reduction inwards world expenditure. Thus in that place volition move a vogue to movement towards indicate M. Thus, at indicate M, MSB = MSS. Therefore, according to Richard Abel Musgrave the optimum size of the budget is decided at a indicate where marginal cyberspace create goodness is zero.

Conclusion ↓

According to Musgrave the optimum size of budget is given yesteryear the indicate where marginal cyberspace create goodness is zero. This indicate corresponds to the indicate of maximum social wages every bit at this indicate MSB = MSS.