Pollution Charges

A pollution charge is a tax imposed on the quantity of pollution that a firm emits. A pollution charge gives a

profit-maximizing firm an incentive to determine ways to reduce its emissions—as long as the marginal cost of

reducing the emissions is less than the tax.

For example, consider a small firm that emits 50 pounds per year of small particles, such as soot, into the air.

This particulate matter causes respiratory illnesses and also imposes costs on firms and individuals.

Figure 12.3 illustrates the marginal costs that a firm faces in reducing pollution. The marginal cost of pollution

reduction, like most marginal cost curves, increases with output, at least in the short run. Reducing the first 10

pounds of particulate emissions costs the firm $300. Reducing the second 10 pounds would cost $500;

reducing the third ten pounds would cost $900; reducing the fourth 10 pounds would cost $1,500; and the fifth
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