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.

Question

Quizplus · Accepted Answer

This statement is correct and represents the basic premise behind pollution taxes. Firms facing a pollution tax would have an incentive to reduce emissions up to the point where the cost of reducing one additional unit of pollution equals the tax savings from not having to pay for that unit of pollution. As a result, pollution taxes can help to align private incentives with social goals of reducing pollution, without the need for government agencies to monitor and regulate emissions directly.

Under a System of Pollution Taxes We Expect Firms to Cut