Final answer:
The pollution tax should be set equal to the marginal external cost at the efficient level of pollution, encouraging firms to adopt the cheapest pollution-reduction technologies up to the point where the cost of further reduction would exceed the tax.
Step-by-step explanation:
If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set equal to the marginal external cost at the economically efficient level of pollution. This ensures that firms face the true social cost of their production, including the externalities of pollution, reflected as the Marginal Social Cost (MSC). The idea is that the tax should incentivize firms to reduce pollution up to the point where the cost of further reduction would exceed the cost of paying the tax. It encourages the adoption of least expensive technologies for reducing pollution and aims for an outcome where pollution is reduced in the most cost-effective manner possible, achieving what is known as the social optimum.
A pollution charge gives firms an incentive to abate pollution up to the point where the marginal cost of abatement is less than the pollution tax. For example, if a firm faces a pollution tax of $1,000 for every 10 pounds of particulates emitted, it will reduce emissions as long as the cost of abatement is less than the tax they would otherwise pay. This mechanism promotes an efficient allocation of resources within the economy and leads to the reduction of pollution without unnecessarily burdening firms.