Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

5. Cannot handle the objective of economic growth and 
stabilisation: Modern economy is concerned with the 
objectives of economic growth and of stabilisation. Benefits 
of these accrue to the whole economy and cannot be 
apportioned among individual members of the society. 
6. Understatement of performances: The more formal 
statement of benefit principle is based on the assumption is 
based on the assumption that each tax-payer reveals his 
preferences for the social goods. When the number of tax 
payers is very large, the individual tax payer may find that 
his contribution is very small and his non-payment will not 
affect the government activity. Therefore, he may have a 
tendency to evade tax and to conceal his true preferences 
for the social good. 
7. Unrealistic assumption of exclusion principle: This 
principle is applicable to the satisfaction of public wants. This 

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overlooks the difficulties of determining the optimal output of 
social wants. 
 
15.1.4 The Ability
–to–pay Principal 
This principle suggests that every person should be taxed 
according to his ability-to-pay. It implies that the broadest shoulders 
should bear the heaviest burden. That is, persons having greater 
ability-to-pay should be taxed heavier, while those with less ability 
should be taxed lighter and those lacking any ability should be 
exempted. Thus, ability approach is based on the assumption that 
those possess income or wealth, therefore, placed in better 
economic circumstances, and should contribute to finance the 
public activities according to their relative abilities. 
The benefit and ability approaches advocate equity in 
taxation. But the fundamental difference between the two is that 
former advocate equity demands that each individual should 
contribute in the form of tax as per the satisfaction derived from the 
social goods, thus suggesting quid pro quo exchange relationship 
between people and the government, while latter approach 
demands that individual should be required to pay compulsory 
according to his ability to pay, without a quid pro quo benefit in 
return. 
Economists put forward two approaches to measures ability
(ii) the subjective approach and
(ii) the objective approach