Does the economy of specialization make work ethics welfare-improving?
It may first be noted that, in the case of an infinite number of individuals and in the absence of ignorance, irrationality, tax distortion, and external effects (on which see below), the artificial encouragement of work ethics cannot increase, but will likely decrease, welfare, ignoring possibly some freak second-best and/or distributional effects. In this case, the advantage of specialization can be fully realized without artificial encouragement of work ethics (in the absence of significant transactions costs whose presence complicates the graphical illustration without affecting the conclusion). Each individual reaches her highest indifference surface by her rational choice depending on her true preference between leisure and goods. In Figure 4, suppose point A touches the highest indifference surface and the individual chooses to have OL amount of leisure. The artificial encouragement (including through work ethics) to work more may make the individual chooses a point like B and a
