Q.A factory's production causes external (pollution) damage estimated at ₹150 per unit of output, a cost not reflected in its market price. The factory currently produces 2,000 units per month. Calculate

A Pigouvian tax is set equal to the marginal external cost per unit, so the polluter's private cost comes to match the true social cost of production. …

Step 1 — Total external cost.

$\text{Total external cost} = \text{damage per unit} \times \text{units produced} = 150 \times 2{,}000 = ₹3{,}00{,}000 \text{ per month}$

Step 2 — Pigouvian tax rate.

The Pigouvian tax principle sets the tax per unit equal to the marginal external cost per unit, so that the factory's private marginal cost, after the tax, equals the true social marginal cost:

$\text{Pigouvian tax per unit} = ₹150$

Step 3 — A caution on 'tax revenue if output stayed unchanged'. …

A frequent error is assuming output stays fixed at 2,000 units after the tax is imposed and treating ₹3,00,000 as the guaranteed permanent tax revenue — the entire purpose of a Pigouvian tax is to change the polluter's incentives and reduce the po …