Consider three firms with different marginal costs of pollution control (abatement). We will measure pollution reduction along the horizontal axis of our economic analysis diagram - so that as we move along the horizontal axis from left to right, pollution is reduced (in contrast to the diagram in the main notes). Sorry - but it is easier to explain this way! And we measure the costs of pollution control per unit reduction in pollution up the vertical axis. Remember that the area under a marginal cost curve measures the total cost (in the long run, with all factors and inputs considered variable). Here is the diagram and the analysis (read explanations 1, 2, 3, 4 in their numerical order. - take your time and work through it carefully - one picture is worth 1000 words!)
The conclusion is that taxes on pollution result in lower costs than a regulation for the equivalent amount of pollution control, when firms have different costs of controlling pollution. [In this diagram, pollution levels S1 + S2 + S3 = 3 times S2.]
But taxes on pollution are frequently resisted and regulation is often preferred, even by the firms causing pollution. Why? Well, justice might be seen to be being done - with the heaviest polluters (firm 1) required to pay more, while the cleaner firms (3) being rewarded for their good behaviour. This would, over time, discourage the worst polluters and encourage the cleaner firms - so regulation might actually encourage a cleaner environment than taxes, and thus be a better way of controlling pollution. So this partial and static analysis is incomplete and thus wrong! Beware partial economic analysis.
More sophisticated analysis deals with the option of issuing licences to pollute to firms, with the total licences equal (in this case) to 3 times S2. Suppose we issue the same number of pollution licences (licence to produce one unit of pollution) to each firm - each firm gets licences for S2 units of pollution. Now allow these firms to buy and sell their licences - to trade them with each other. What would happen? The dirty - high cost - firm (1) would be prepared to pay more for an extra licence to pollute than the clean - low cost - firm 3 would be prepared to accept for selling a licence. So firm 1 would buy licences from firm 3, allowing firm 1 to pollute at level S1 rather than S2, while firm 3 only retains sufficient licence to pollute at level 3 (less pollution). Once again, there is now a financial incentive for firms to clean up their act - the more licences they can sell, the more revenue they will earn, while the more they need to buy licences to pollute, the more expensive their production processes will be. In addition, it might be better for the tax/regulation authority to sell the licences to polluters - thus converting the regulation (licence) into a tax. This is the logic underlying the recent international convention on tradeable carbon dioxide pollution licences.
Nevertheless, there continues to be a public resistance to the notion that firms should be allowed to pollute by paying either a tax or for a licence to pollute. This may be because the general presumption is that pollution causes far more damage than is warranted by the benefits of the production which generates the pollution (the marginal damage curve of the main notes is well above the marginal cost/benefit curve). Whether or not this is true for you depends on your relative valuations of the products versus the pollution damage. The richer you are, the more likely you are to place a high value on the environment and a lower value on the products produced with pollution. When you are rich, it is easy to think that you could survive and prosepr in a world where products are more expensive and the environment is better. But some might regard this position as being rather selfish, don't you think?
It might also be pointed out that regulation can be a lot simpler and easier than imposing taxes, since the latter requires that every single unit of pollution is measured. Regulation might only involve the occassional check and heavy fine or penalty, making the risk and penalty of being caught enough to persuade firms to behave without having to continually check on them, so long as the penalties are high enough. The lower the penalty, the more frequently and extensively we would have to check.
In any event, both taxes and regulation require that society (through their governments) comes to some decision about how much pollution is acceptable, since our very presence on the planet, still more our processes of living, inevitably causes some pollution. Zero pollution overall is not attainable, any more than perpetual motion (with no waste energy) is possible. Some careful and intelligent use of economics can help in reaching these decisions, or at least illuminating the key questions.