A tax to impose a socially optimal level of pollution would add to the firm’s average costs of production an amount equal to the cost imposed on everyone affected.

To achieve the socially desirable level of pollution, it will always be more efficient to impose a tax per unit of pollution than to regulate the quantity of pollution emitted by each firm.

If the government regulates an industry consisting of two firms using a cap-and-trade scheme and distributes pollution permits equally between them, the one which finds abatement less costly will sell pollution permits to the other firm.