scooping up the rent

To get to the constrained Pareto e

fficient outcome, the social planner would have to tax away

pure pro

fits to subsidize wages until w∗ = F (L)

L

. But:

•

The social planner’s solution will be more socially efficient but will not generate a Pareto

improvement.

•

Taxation will make firms strictly worse off and workers better off.

•

Unless workers and firms are the same people, this welfare improvement requires redistribution.

•

Hence, this model suggests a violation of the Second Welfare Theorem: efficiency and

distribution are

not separable problems in this economy.

1.12 Summary

This