Compared to a fixed percentage reduction regulation,a tax on pollution encourages

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A tax on pollution encourages firms to reduce pollution by choosing the most cost-effective method to minimize their tax liability. Therefore, the firms that can most economically reduce pollution make the largest reductions. This creates an incentive for firms to innovate and develop new, more efficient technologies while minimizing economic inefficiency. Fixed percentage reduction regulation, on the other hand, may impose a significant burden on firms that cannot easily reduce pollution, regardless of the cost. In this sense, a tax on pollution is a more efficient and flexible policy instrument than a fixed percentage reduction regulation.

Compared to a Fixed Percentage Reduction Regulation,a Tax on Pollution