2. One of the criticisms of using indirect controls such as pollution taxes to limit pollution is that firms will simply view the taxes as a part of the cost of doing business and pass the cost along to their consumers while continuing to pollute as before.

a. Explain the relationship between the size of a firm’s marginal abatement costs and the pollution tax that is implied by the above statement.

b. Describe the shape of the market demand curve implied by the above statement. For what industries might this condition come closest to being true?

c. Might the shape of the demand curve for the industries you described above change over time if a pollution tax is imposed? If so, then why?

(Hint: consider the dynamic incentives for developing substitutes.)