Imposition of Tax

Optimality condition after merger has several useful interpretations. Each of these interpretations suggests a method to rectify efficiency loss caused by production externalities. First, interpretation is that steel firm is facing incorrect price for one of its products which is pollution. For steel firm, production of pollution costs nothing. This situation can be rectified by making sure steel firm faces correct social cost. One way to achieve this is to impose tax on pollution. Suppose that quantity tax or unit tax of ‘t’ per unit is imposed on pollution. As a consequence, profit maximizing condition for steel firm can be written as.
p = PSS – CS (S, X) – tx