Marginal Product

MP1

MP2

Marginal Disutility of Effort (MDE)

L1 L2 L3 L4

MP1 is the marginal product of labor

MDE is the marginal disutility of work effort

With no tax, L3 effort is supplied and grain production is the area 0ABL3

D

Marginal Product

MP1

MP2

Marginal Disutility of Effort

L1 L2 L3 L4

D

Under the GLF, the tax rate is CD. L2 units of effort is supplied and workers keep the quantity ACL2 – Q1Q2CD for themselves. Output L2CBL3 is not produced. Deadweight loss is DCB.

Marginal Product

MP1

MP2

Marginal Disutility of Effort

L1 L2 L3 L4

DUnder the HRS, the lump-sum tax collected is Q1Q2CD. L3 effort is supplied. Production is 0ABL3. Workers retain 0ABL3 – Q1Q2CD

Marginal Product

MP1

MP2

Marginal Disutility of Effort

L1 L2 L3 L4

D

EUnder GLF if workers find a way to increase productivity to MP2, tax rate would increase to DE. Work effort would fall to L1. If workers overstated production, tax rate would increase to DE.