This paper attempts to quantify direct as well as indirect costs and benefits of selected components of government expenditure on education when education is considered as a part of system pertaining to social services and social services are linked meaningfully with real sector variables, expenditure on economic services and socio demographic variables. Distributional impact of government expenditure on education is examined in accordance with three different criteria. The study is extended to determine optimal government expenditure and associated policy for future years annually for the state of Gujarat and its three selected development blocks. Regional variations in respect of existing problem areas and their solutions are revealing and the same suggest that efforts should be made to follow decentralised approach for educational planning and the same ought to be compatible with relevant man power needs of the economy in question.