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      Question

      Assertion (

      • A : The point of Maximum Social Advantage is achieved when the government increases its budget size until the Marginal Social Sacrifice (MS
      • B of public expenditure. Reason (
      • R : According to the law of diminishing marginal utility, the benefit derived from additional units of public expenditure decreases, while the sacrifice from additional units of taxation increases due to the rising marginal utility of remaining money.
      • S of taxation equals the Marginal Social Benefit (MS
      A Both (A) and (R) are true, and (R) is the correct explanation of (A). Correct Answer Incorrect Answer
      B Both (A) and (R) are true, but (R) is not the correct explanation of (A). Correct Answer Incorrect Answer
      C (A) is true, but (R) is false. Correct Answer Incorrect Answer
      D (A) is false, but (R) is true. Correct Answer Incorrect Answer

      Solution

      Understanding the Assertion (A) The Principle of Maximum Social Advantage, propounded by Hugh Dalton , states that the best system of public finance is one that secures the maximum social advantage from its fiscal operations.

      • Marginal Social Sacrifice (MSS): When the government imposes a tax, every unit of money taken from a citizen results in a "sacrifice" or loss of utility.
      • Marginal Social Benefit (MSB): When the government spends that money, every unit of expenditure provides a "benefit" or utility to society.
      • Equilibrium: The government should continue its fiscal operations as long as MSB > MSS. The "optimum" or maximum advantage is reached exactly at the point where MSB = MSS. Beyond this point, the cost to society (sacrifice) outweighs the gain (benefit).
      Understanding the Reason (R) The reason explains the behavior of the curves involved in this principle:
      • Decreasing MSB: As the government spends more on public services, the utility of each additional rupee spent declines (Law of Diminishing Marginal Utility). For example, the first hospital built provides massive utility; the 100th hospital provides relatively less.
      • Increasing MSS: As people pay more taxes, their remaining disposable income decreases. Since money is a scarce resource, the marginal utility of the remaining money increases. Therefore, giving up each additional rupee feels like a progressively larger sacrifice.
      Because the MSB curve is downward-sloping (diminishing benefit) and the MSS curve is upward-sloping (increasing sacrifice), they must eventually intersect. This intersection is the only point where the net social advantage is maximized. Thus, the behavioral laws mentioned in the Reason (R) are exactly why the equilibrium condition in the Assertion (A) exists.

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