Problem
Assume that a smoky factory emits pollution that causes damages to downwind residents of a small town. And assume that the government has imposed an emissions tax on the factory that is equal to marginal damages evaluated at the efficient level of pollution. This outcome, and the remainder of the economy, is efficient. Now suppose the population of the town doubles. Are the pollution level and emissions tax still efficient? If so, explain why. If not, explain what has to change to restore efficiency.