Pollution Fees (Emission Tax)

Emission taxes involve tax payments that are directly related to the measurement (or estimation) of the pollution
caused. Developed countries such as US, UK, Japan etc. use this nature of taxes.
The basis is how much of pollution (gas, fumes, solids, liquid etc.) exposed to the environment as an each unit of emit.
This is to achieve efficient level of pollution control and to reduce the same. Level of pollution cannot bring down to zero
level but it should be bringing down to social acceptable efficient level. Hence should be consider about
1. Cost of pollution reduction
2. Social benefits of pollution reduction


Marginal Cost curve (MC)

* Pollution Tax

Marginal Social Benefit curve (MSB)
0 e*

Action which can take:
1. Emit pollutant with permit of the local authority by paying * of money.
2. Adopting new machinery and method internally reduce the emission (which need capital)
How to decide whether to emit or manage within the plant
1. When you are in A pollution fee push you towards to C social benefit is low
2. When you are in B pollution fee push you towards to C because pollution fee is higher than MC
When you are in point C it is much better to emit than manage it within the plant because MC=MSB=F. Reduction of
pollution is not always beneficial to the society.

S


P* D
0 Pollutant permit
Amount $
Level of pollution reduction
A B C
A = MSB MC - Increase
B = MC MSB - Reduce
C = MC = MBC = * - Precise
Internalizing externalities
Now externalities are not anymore in the external
market but in the market sphere. Pollution taxes and
permits are the tools of internalizing them. In US
pollution permits are profitable business.