Question

Suppose firms in a perfectly competitive industry generate water pollution as a by-product of their production, and they are not charged for this. Who benefits from their use of the environment as a dumping ground? If an emissions tax is imposed, costs to these firms increase and emissions drop. Who will bear the burden of this tax? Is that fair?

Answer 1

Ans. The industry benefits from using water as a free dumping space. As in this way they don't have to consider the marginal social cost while making output decision.
An emmision tax increases the cost of the industry which will increase the price of the good from the industry. Now this tax burden will be partially shared by the consumer as increase in price (unless supply is perfectly inelastic). This will reduce consumer welfare. Although this is not fair for the consumer but emission tax may encourage industry to shift to less pollution causing methods of production which will improve the condition of the water which is a public good, thus, will benefit the consumers also.

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