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. . ..l::a o -J w the discharge of pollutants or charges are made for the amount of pollutants discharged. The basic condition for optimum resource allocation can in principle be satisfied by either scheme, since under either scheme just enough incentive can be provided so that the marginal cost of fur- ther abatement approximates the marginal benefits of fur- ther abatement. There are, however, three reasons for believing that charges are preferable to subsidies: . . 1. There is no natural "origin" for payments. In principle, the payment should be for a reduction in the dis- charge of pollutants below what it would have been without the payment. Estimation of this magnitude would be diffi- cult and the recipient of the subsidy would have an obvious incentive to exaggerate the amount of pollutants he would have discharged without the subsidy. The establishment of a new factory would raise a particularly difficult prob- lem. The trouble is precisely that which agricultural pol- icy meets when it tries to pay farmers to reduce their crops. Jokes about farmers deciding to double the amount of corn not produced this year capture the essence of the problem. 2. Payments violate feelings of equity which many people have on this subject. People feel that if polluting the air is a cost of producing certain products, then the consumers who benefit ought to pay this cost just as they ought to pay the costs of labor and other inputs needed in production. 3. If the tax system is used to make the payments, e. g., by permitting a credit against tax liability for re- duced discharge of pollutants, a "gimmick" is introduced into the tax system which, other things being equal, it is better to avoid. Whether or not the tax system is used to make the payments, the money must be raised at least partly by higher taxes than otherwise for some taxpayers. Since most of our t~es are not neutral, resource misallo- cation may result.. 0 .' . . . . . The foregoing analysis by Mills is probably more applicable to point sources of pollution, as is the case with most air pollution. Diffuse sources, however, cannot be so directly dealt with using charges, as . noted in previous sections. It may be necessary to impose charges or restrictions on output or directly on input use for diffuse sources, . 35 , .