What is a Pigouvian tax? The U.S. government has placed a Pigouvian tax on CFCs; explain how this tax works.

A Pigouvian tax is a charge levied on the production of a product that generates negative externalities. If set correctly, the tax will precisely offset the overallocation (overproduction)generated by the negative externality. The U.S. government has placed a tax on CFCs, which deplete the stratospheric ozone layer protecting Earth from excessive solar ultraviolet radiation. Facing this tax, manufacturers must decide whether to pay the tax or expend additional funds to purchase or develop substitute products. In either case, the tax raises the marginal cost of producing CFCs, decreasing supply and shifting the supply curve for the product to the left. The equilibrium price rises, and the equilibrium output declines. The tax eliminates the initial overallocation of resources and the associated efficiency loss.