Although regulation and corrective taxes are both capable of reducing pollution,
the tax accomplishes this goal more efficiently. The regulation requires each factory
to reduce pollution by the same amount. An equal reduction, however, is not neces-sarily the least expensive way to clean up the water. It is possible that the paper mill
can reduce pollution at lower cost than the steel mill. If so, the paper mill would
respond to the tax by reducing pollution substantially to avoid the tax, whereas the
steel mill would respond by reducing pollution less and paying the tax.
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