In a first-best, deterministic world, it is well-known [2; 28; 30] that a unit tax on emissions, equal to marginal damage, is an efficient mechanism for internalizing the damages caused by polluting firms. A unit subsidy for emissions abated, also equal to marginal pollution damage, has the same desirable property, but only in the short-run. In the long-run such subsidies induce polluting firms to operate at too small a scale and attract an excessive number of new firms to the polluting industry. This can have the perverse result that there are more emissions when abatement is subsidized than when it is not. Nevertheless, economists have been reluctant to give up entirely on the subsidy approach, recognizing with Oates [23, 290] that Polluters will obviously be far more receptive to measures that assist with the costs of pollution control than to those that place the burden upon themselves. It is therefore not surprising that economists have continued to look for and find new justifications for subsidizing pollution control. Thus Mestelman [20, 187] argues that ... the subsidy scheme may be a second-best alternative for externality control . . when the direct taxation alternative is not politically viable. McHugh [17, 64] shows that ... subsidies for pollution abatement expenditures can be a useful instrument in the case of cost-increasing technological innovations. Harford [6] demonstrates that subsidies for pollution control inputs may be efficient when enforcement is sufficiently costly. Harford [7] makes still another argument for subsidies in the case in which the day-to-day performance of abatement equipment is uncertain, but the uncertainty can be reduced by maintenance expenditures. Finally, there are schemes for combining subsidies and taxes [14; 26]. Given the continuing interest in subsidies, it is important to examine carefully the disturbing case in which subsidies increase rather than decrease total emissions.