Suppose that the nation wide average cost of air pollution generated by a car is $1,000. Would a tax of $1,000 on every car induce people to take external costs into consideration and bring about the optimal price and output for autos? Explain

What will be an ideal response?

Not necessarily. The $1,000 is an average. Some cars cause more pollution and some less. Cars in Wyoming impose fewer external costs than cars in Los Angeles, and cars that are driven more miles pollute more. A system of pollution fines would be more effective in reducing pollution if the taxes differed depending on the make, with high-polluting cars taxed more, and if part of the tax were on gasoline to reflect cars driven more. We also would want taxes to differ depending on where the car was located.