The profit motive will lead them to find the lowest cost method of pollution abatement. They only work if it is possible to measure emissions accurately. They are not effective when it is necessary to ban an activity completely. In practice it is difficult to set the tax rate at the optimal level. It is not possible to control pollution in the area of a specific firm if the firm has a high cost of pollution control, it will pay the tax and continue to pollute.
Tradeable emissions permits Tradeable emissions permits are rights to pollute .
Typically rights to pollute a certain amount are auctioned off to the highest bidder. It is typically firms with the highest costs of reducing pollution that buy up the rights to pollute. In essence a market in pollution rights is created. Tradeable emissions permits can achieve the same outcome as emissions taxes but their great advantage is that they don t require as much information. Many people like the idea of tradeable emissions permits because they represent what is effectively a market solution to a market failure.