Question

A tax on pollution will cause a firm to reduce its pollution until the

a. EPA is satisfied that the pollution output is at a safe level.
b. Firm runs out of money to reduce pollution emissions.
c. Safe level is reached.
d. Marginal cost of abatement is equal to the tax rate

Answer 1

The correct answer is D. A firm will reduce pollution until the marginal cost of abatement equals the tax rate. Given a pollution tax of $1,000 per 10 pounds of particulates, the firm in this scenario will abate 30 pounds of pollution, where the cost of abatement is lower than the tax, and will pay the tax on any further emissions.

Step-by-step explanation:

A tax on pollution will lead a firm to reduce its pollution until the marginal cost of abatement is equal to the tax rate. Specifically, in the scenario provided, if the firm faces a pollution tax of $1,000 for every 10 pounds of particulates emitted, it will choose to abate pollution as long as the cost of abatement is less than the tax.

For the first 10 pounds, abatement costs $300, for the second $500, and for the third $900, all of which are less than the tax. However, the fourth 10 pounds would cost $1,500 to abate, which is more than the tax; therefore, the firm will pollute this portion.

Consequently, the firm will abate 30 pounds of pollutants and pay the tax for the rest because it is more economical to do so.