A firm that produces chemical solvents creates some air pollution because of the emissions from its manufacturing facilities. A tax is imposed on the firm, equal to the costs of environmental damage caused by a unit of the emissions. What is the result?
Demand for the chemical solvents will decrease.
Consumers of the chemical solvents will be willing to pay the full amount of the tax, and so the quantity produced will be unaffected.
Demand for the chemical solvents will increase.
The quantity of chemical solvents produced now will be the efficient amount.