Chapter 9 Market Failure: Imperfect Information, External Benefits, and External Costs

| November 9, 2018

A pollution tax internalizes the costs of pollution a firm is imposing on others.

A pollution tax allows a firm to externalize some of its internal costs.

As the volume of waste decreases (holding the amount of paper produced
constant), the production cost per ton of paper increases at a decreasing rate
because the firm must use increasingly sophisticated abatement equipment to
decrease the volume of waste.

Under a system of pollution taxes we expect firms to cut pollution until the
marginal benefit from tax savings equals the marginal increase in production
costs due to decreasing pollution.

In a competitive market, a pollution tax increases the equilibrium price of the
polluting good, decreases the equilibrium quantity, and decreases the volume of

A carbon tax will raise the price of an energy-intensive good such as steel.

A carbon tax would increase the total volume of greenhouse gases.

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