Suppose the government imposes a tax for each unit of pollution that a firm produces.The firm will

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If the firm stops producing altogether, it will not be able to generate any revenue to pay the tax. Similarly, ignoring the tax and continuing to produce the same amount of output can lead to hefty penalties and fines. The firm may also not be able to increase output enough to offset the tax payment without considering other cost implications. Therefore, the best choice for the firm is to reduce emissions until the marginal cost of any further reduction in pollution is equal to or greater than the tax. This means that the firm can produce goods while reducing pollution by paying the tax only for emissions that are costlier to reduce than to emit. In this way, the firm can comply with environmental regulations while remaining profitable.

Suppose the Government Imposes a Tax for Each Unit of Pollution