In Kanpur, the leather factories bring prosperity — but the Ganga carries their waste downstream. The factory counts its profits. The village counts its sick. The cost is real, but invisible on any balance sheet. This is an externality.
Discover the hidden costs of production — and why markets alone can't fix them.
When a factory produces goods, it creates profit for the owner — but also pollution for the community. This pollution is a negative externality: a cost imposed on others not reflected in the market price. Without regulation, factories over-produce because they don't pay the full social cost.
Rounds 1–4: No regulation. Choose your production level (0–100) freely.
Rounds 5–8: A Pigouvian tax of ₹3/unit is enacted — now you pay the social cost.
Your goal: Maximise profit — but watch what happens to the community.
The community watches your decisions.
| Round | Phase | Production | Revenue | Cost | Profit | Social Cost | Welfare |
|---|
Named after economist Arthur Pigou, it sets the tax rate equal to the marginal social cost. This "internalises" the externality — making polluters pay the true cost. When set correctly, the profit-maximising level equals the socially optimal level.
Without tax: Profit = 8q − 0.03q². Maximised at q ≈ 133 (capped at 100).
With tax: Profit = 5q − 0.03q². Maximised at q ≈ 83.
This matches the social optimum where marginal benefit (8 − 0.06q) = marginal social cost (3).
Carbon taxes in Sweden and Canada price CO₂ emissions. India's National Green Tribunal fines polluting industries. Plastic bag bans internalise waste costs. The principle: make the price tell the ecological truth.