I had earlier mentioned about government intervention in the case of polluting by firms. One way to intervene is by imposing a tax. So i am introducing the concept of Pigovian tax. But there are more efficient ways of regulating pollution, one of the comments i recieved state a more market friendly way of reducing pollution; which i agree to.
Early in the 20th century, the English economist Arthur C. Pigou argued for the imposotion of taxes on generators of pollution. Since the social cost of pollution is in excess of the private cost (it is a negative cost since they save money by polluting) to the pollutor, the government should intervene with a tax, making pollution more costly to the pollutor. If the pollution is more costly to produce, the pollutor will produce less pollution. This tax has come to be called a Pigovian fee or Pigovian tax. The fee is generally paid to the government. The Pigovian fee is not any emission fee; it is the marginal savings from pollution at the optimum pollution level.
This fee is not a market friendly way of controlling pollution. It is imposed on the people. Offering these firms incentives on reducing their emission levels would help more rather than imposing a tax.