Market Effects of a Pollution Tax
The pollution tax shifts the supply curve up by $10, and the market settles in equilibrium at a price of $37 and 36 tons of cardboard.
- A pollution tax of $2 per gallon of waste increases the marginal cost of producing cardboard by $10 ($2 x 5 gallons per ton).
- The tax forces firms to bear the full cost of production, including the cost of pollution.