Abstract
The purpose of this paper is to apply some of the existing microeconomic theory literature on intra-industry adjustment resulting from factor price changes to the use of corrective taxes on externalities. The optimal tax to correct the effects of an externality is one placed directly on the external damage. Such a tax is sometimes not practically feasible, in which case either the inputs or output of firms in the externality-producing industry must be taxed as a proxy for the external damage.
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