A tax on pollution is designed to confront a person or company causing pollution with the sum equivalent to the social costs they are imposing on others. Firms pay taxes on the income both in the legal sense that the company is an individual and in the economic sense that company is a tax on them. Taxation can be used to correct market failures.

Pollution are things that cause discomfort or harm to our environment, it can be in different form such as air, water, noise, heat. Things that causes pollution are called pollutant because they harm living organism, causing global warming which is when the temperature on the earth is getter hotter and climate change.

A pollution tax can promote productive efficiency when a firm produces where price is equal to marginal cost, Also when the firm produce at any given output at the lowest possible cost, given in this case that this is a perfect competitive market.

Externalities are spill over cost or benefit we can refer to external economies and diseconomies. Externalities can either be good or bad, when good is called benefit and bad cost. The benefit is when the society are affected beneficially they are said to be external benefits, while cost is when the society are affected adversely .It creates a divergence between private and social costs and benefit. All cost are incurred by the producers and all benefits are reaped by their customers. The costs are often clearer when specific government activities are considered rather than taking everything in one lump. Externalities in production are very important in the real world.

Pollution can be seen as an externalities. Taking a industry for example they throw their waste into the river and its smoke into the air. Apart from pollution been an externality, creation of a shopping mall increases traffic in the area causing discomfort to the people living in that area can also be seen as an externality. External cost of production is when the marginal social cost is greater than the marginal cost(MSC>MC).The problem of external cost arises in a free- market economy because no one has legal ownership of the air or river.

Marginal cost (MC) is where the firm gets to produce its goods and services. It is the cost of the firm or private cost, this does not include the cost of pollution on the environment that the firm creates, these are external cost to the firm. We tax a firm that has external to make up to the society. marginal social cost(MSC) lies above the marginal cost(MC). Given MSC>MC, MSC is where the society wants the firm to produce ,the vertical difference between the MSC and MC is the external cost which is referred to pollution that the firm emits in the environment causing discomfort to the society. The individual who live and work around where the waste has been deposited bears the cost arising from the industry.