The similarity of the two policies

The similarity of the two policies can be seen by considering the market for
pollution. Both panels in Figure 4 show the demand curve for the right to pollute.
This curve shows that the lower the price of polluting, the more firms will choose
to pollute. In panel (a), the EPA uses a corrective tax to set a price for pollution.
In this case, the supply curve for pollution rights is perfectly elastic (because
firms can pollute as much as they want by paying the tax), and the position of the
demand curve determines the quantity of pollution. In panel (b), the EPA sets a
quantity of pollution by issuing pollution permits. In this case, the supply curve
for pollution rights is perfectly inelastic (because the quantity of pollution is fixed
by the number of permits), and the position of the demand curve determines
the price of pollution. Hence, the EPA can achieve any point on a given demand
curve either by setting a price with a corrective tax or by setting a quantity with
pollution permits.