The economically efficient level of pollution control requires that we know both the marginal benefits and marginal costs of pollution control. In addition, without knowledge of the firms' marginal costs of control, we don't know, before the fact, how much pollution control a tax of a given magnitude will produce. Taxes give firms an incentive to develop lower-cost pollution control methods because, by doing so, the firms can lower their overall costs of complying with the pollution control policy. So long as marginal control costs are less than the tax, the firm will control that unit of pollution and avoid paying the tax. This has the effect of lowering the amount of pollution emitted by firms over the long run, ceteris paribus.
Tradable permits create the same incentives.
If firms can lower control costs below the price of permits, they can comply with the policy more cheaply. The purpose of benefit-cost analysis is to assist policymakers when they have to select from a range of policy options. Benefit-cost analysis is used to identify the option that yields the greatest net benefits. In the case where alternatives can be arranged on a continuous scale, the option for which marginal benefits equal marginal costs is the preferred option on economic grounds. When there are significant discrete differences among alternatives, the preferred alternative is identified by calculating the difference between total benefits and total costs and selecting the alternative for which this difference is greatest.