Which of the following describes a per-unit pollution tax in the context of Pigouvian taxation?

• A. It is a tax that is not related to pollution
• B. It is a subsidy that promotes pollution
• C. It is a Pigouvian tax
• D. It is a tariff on emissions

Answer: (C)

A per-unit pollution tax is a Pigouvian tax: a charge levied for each unit of pollution emitted, meant to reflect the social cost of that pollution. By imposing this tax, the firm’s private cost rises by the amount of the tax, so the marginal cost curve effectively shifts upward. This internalizes the external harm, nudging production and emissions toward the socially optimal level. In theory, the tax should equal the marginal external cost at that optimum, which helps align private decisions with the true social costs and reduces the deadweight loss from the negative externality. It is not a subsidy, which would promote more pollution; it is not unrelated to pollution, since it is imposed specifically on emissions; and it isn’t a tariff, which is a trade policy rather than a pollution-control mechanism.