Show how moving from a lump sum tax to a linear tax affects outcomes in terms of output and work effort. What is the effect on economic efficiency? Explain through a diagram how this change in policy leads to an outcome that is not Pareto Optimal. You should use a linear PPF (so that the wage without distortions is constant everywhere). [Some hints. It is impossible to answer this question without drawing one PPF and two budget constraints one with a linear tax the other with a lump sum tax. They differ 2 in their slopes which is essential to answer this question. An equilibrium is a point in consumption-leisure graph which almost always has two properties: (1) An indifference curve is tangent to the budget constraint and (2) the point is on the PPF. With lump sum taxes, the BC is tangent to the PPF so that it is also tangent to the indifference curve (all three have the same slope at this point). With linear taxes, at the equilibrium point, the PPF intersects the budget constraint. The budget constraint but not the PPF is tangent to the indifference curve at the equilibrium point.]