A pollution tax that is exactly equal to marginal external cost will shift the market supply curve to the social-cost supply curve. This tax will thus correct the market inefficiency due to negative externalities by causing price to reflect the full marginal cost of production.

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A pollution tax that is equal to the marginal external cost will internalize the negative externality by making the polluter pay the full social cost of production. This will shift the market supply curve to the social-cost supply curve and align the private and social incentives. As a result, the market will reach the efficient outcome where price reflects the full marginal cost of production, including the external cost imposed on society.

A Pollution Tax That Is Exactly Equal to Marginal External