Abstract
Point sources ac-count for approximately 42 per cent of nitrogenemissions to Port Phillip Bay, Victoria(Parslow, Skyring and Walker 1996). In theMurray River, point sources contribute a sig-nificant portion to the estimated $46 millionper annum cost of salinity (Murray DarlingBasin Commission 1999). Naturally occurringmarkets do not fully account for these externalimpacts as water quality is non-rivalrous andnon-excludable. It is therefore important forregulators to intervene in the economy to miti-gate this market failure.Policy interventions available to regulatorsinclude command and control regulation andmarket-based or economic incentives. This ar-ticle will discuss two forms of economic incen-tives, taxes and tradable emissions permits.Economic incentives differ from command andcontrol regulation in two main ways: (i) differ-ences in firms’ marginal pollution control costsdetermine the allocation of pollution control re-sponsibility, and firms can shift their marginalcost curves through innovation; and (ii) themarginal costs of pollution control are equal-ised in equilibrium.
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